Business Contracts

Business Environment and Law
Block
IV
BUSINESS CONTRACTS
UNIT 12
Law of Contracts 1-24
UNIT 13
Special Contracts 25-56
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BLOCK IV: BUSINESS CONTRACTS
The fourth block is an introductory block on business laws. Contract law is the
basic structure of business law and every type of business involves the contracts
in one form or the other. In this block we briefly review the essential features of
a contract, the various types of contracts, the requirements of parties to the
contract, and the features of special contracts such as guarantee contracts,
indemnity contract, the modes of performance and remedies in case of breach of
a contract.
Unit 12 outlines the general principles and rules governing contracts. This is
discussed with reference to the Indian Contract Act, 1872 which deals with the
essential features of a valid contract and the competence of parties to the
contract. It also discusses the various remedies available to the parties in the
event of breach of a contract.
Unit 13 deals with concepts of special contracts such as contract of agency,

contracts of guarantee, contracts of indemnity, and employment contracts.
It also deals with special rights available to parties in a contract. A brief

discussion on the various important clauses in commercial contracts and
procedural aspects of documentation has been discussed to fine-tune the legal
skills.
Unit 12
Law of Contracts
Structure
12.1 Introduction
12.2 Objectives
12.3 Contract
12.4 Essential Elements of a Valid Contract
12.5 Certainty and Possibility of Performance
12.6 Classification of Contracts/Agreements
12.7 Void Agreements
12.8 Remedies for Breach of Contract
12.9 Summary
12.10 Glossary
12.11 Suggested Readings/Reference Material
12.12 Suggested Answers
12.13 Terminal Questions
12.1 Introduction
The daily life of an individual is governed by innumerable agreements such as the
purchase of a bus ticket, a cool drink, or giving a vehicle for repair, which involve
contracts. However, the Law of Contracts focuses not only on these simple consumer
transactions but also on more complicated commercial transactions taking place
between corporates.
All these contracts as such create legal rights and obligations.
The law of contracts is considered as a part of the law of obligations. A contract
creates self-imposed obligations. It establishes the reciprocal responsibilities of the
parties along with the extent and standard of their performances. Finally, it also makes
allowance for any loss arising out of any mishap or non-happening of any event. In
this unit we shall deal with all the important aspects of contract law.
12.2 Objectives
After going through the unit, you should be able to:
 Explain the meaning and nature of the contract, essential elements of a valid
contract;
 Assess the position of a minor and a person of unsound mind in contracts;
 Identify and differentiate voidable contracts from void contracts;
 Determine ways by which a contract is discharged by performance; and
 List out the remedies for breach of a contract.
12.3 Meaning of a Contract

A contract is the result of a promise to do or not to do a certain thing in exchange for a
promise from another person. Contract law assures that the promise so made is legally
enforced, if any one of the parties fails to abide by the contract.
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A contract is said to create a legal bond – a vinculum juris. This arises only when the
parties have intended to create a legal relationship between them. The infringement of
such obligations will make the parties liable to the extent of the loss suffered by the
aggrieved party for non-performance of the agreed act.
Balfour vs. Balfour: Balfour was employed in Ceylon and he promised to send his
wife, 40 pounds a month so long as they had to remain separate. The wife owing to
her ill health had to stay in England and could not accompany him to Ceylon.
Subsequently the husband failed to send the money as agreed. The wife sued for
breach of contract. It was held that this agreement was not a contract enforceable in a
Court of Law. The principle laid down is ‘Agreements of social or domestic
nature shall not constitute legal relationships and thus not valid contracts. Such
agreements are not enforceable in the court of law’.
All the definitions of contract refer to agreements between individuals and are
enforceable by law constitutes two basic requirements. They are:
 An agreement.
 Legal enforceability.
According to Section 2(h) of the Contract Act, “An agreement enforceable by law is a
contract.”
According to Section 2(e) of the Act, “Every promise and every set of promises,
forming the consideration for each other, is an agreement.”
Section 2(b) defines a promise as: “When the person to whom a proposal is made
signifies his assent thereto, the proposal is said to be accepted. A proposal when
accepted becomes a promise.”
Section 2(a) defines a proposal as: “When one person signifies to another his
willingness to do or to abstain from doing anything, with a view to obtaining the
assent of that other to such act or abstinence, he is said to make a proposal.”
Thus, a contract is an agreement; an agreement is a promise and a promise is an
accepted proposal.
Agreement
An agreement becomes a contract only when one party makes a proposal or offer to
the other party and that other party signifies his assent thereto. Thus, an agreement is
an offer coupled with acceptance. There emerge two essentials of an agreement which
are:
 Plurality of persons.
 Consensus ad idem.
Plurality of Persons: Obviously an agreement is between two or more persons as a
person cannot enter into an agreement with himself or with an inanimate object.
‘Consensus ad idem’: One of the most essential elements in the making of a contract
is that the promisor and the promisee must agree about the same thing in the same
sense. There should be a meeting of minds. The identity of minds is called consensus
ad idem. This is the theory underlying the formation of contracts. In a contract of sale
of house between ‘A’ and ‘B’ where A has two houses in Hyderabad and Chennai
respectively; and A intends to sell his house at Hyderabad but B intends to buy A’s
house at Chennai, there is no consensus ad idem between the contracting parties and
hence no valid contract ensues.
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Unit 12: Law of Contracts
12.4 Essential Elements of a Valid Contract

Section 10 of the Indian Contract Act, 1872 describes the requirements of a valid
contract. According to this section, “All agreements are contracts if they are made by
the free consent of parties competent to contract for a lawful consideration and with a
lawful object- and are not hereby expressly declared to be void.”
“Nothing herein contained shall affect any law in force in India and not hereby
expressly repealed, by which any contract is required to be made in writing or in the
presence of witnesses, or any law relating to the registration of documents.”
From this definition we understand that an agreement becomes a contract when it
involves competent parties, valid consideration, free consent and legal object.
Some of the essential elements of a valid contract are discussed below:-
12.4.1 Offer and Acceptance

An agreement presupposes an offer by one party which is accepted by another party.
Therefore one without the other does not bring an agreement into existence which can
be legally enforced. Mere offer does not conclude a contract unless it is accepted by
the other party to the contract. It is in this aspect that distinction is sought to be made
between an offer and an invitation to offer. Thus a proposal or offer is the starting
point to initiate an agreement which could finally lead to a contract. There must be a
‘lawful offer’ and a ‘lawful acceptance’ for a valid contract.
Offer and Invitation to Offer are two distinct terms. An Offer is a definite term
capable of converting an intention into Offer. It is legally enforceable. An invitation to
offer is a process of circulating an offer. It is an attempt to induce the party/ies to
accept the offer. It is not enforceable in any court of law.
The following figure gives an outline of the concepts covered under offer and
acceptance:
Figure 1
Source: Smith & Keenan’s. Advanced Business Laws.

Rules for a Valid Offer
Proposal has been used as a synonym for the term ‘offer’ as used under the English
Law. Thus, the offer or proposal must be made with a view to obtain the acceptance of
the person to whom it is made. If a statement is made without this intention then it
remains a mere statement and not a valid offer. The person who makes the offer is
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called the ‘offeror/ promisor’ and the person to whom the offer is made is called the
‘offeree/promisee’. From the definition of a proposal as mentioned in Section 2(a) of
the Indian Contract Act, the following propositions follow:
 It must be an expression of the willingness to do or abstain from doing a
particular act.
 The willingness must be communicated to another person.
 It can either be expressed or implied.
 It can be general or specific. It can be to public at large or to a category of persons
or to a specific individual.
 It must be communicated with intent to receive the assent of the other person for
such an act or abstinence. Therefore, a mere enquiry or statement of intention
does not amount to an offer.
 It must be capable of creating a legal relationship.
 It must be certain and definite, leaving no room for ambiguity.
Kinds of Offer
Offers can be categorized into different classes as given below:
General or Specific Offers: An offer may be made either generally, to the whole
world or specifically to an individual or group of individuals. The former is called the
general offer and the latter, specific offer. A general offer is made to the world at large
or to the general public and may be accepted by any person who fulfills the necessary
conditions. The case of Carlill vs. Carbolic Smoke Ball Co. is an instance of general
offer. On the other hand if the offer is made to a particular person(s), it may be
accepted only by those person(s). Thus where X makes an offer to sell his library to
the College, Z alone can accept it.
Express or Implied Offers: An offer may be made either in words, spoken or written
or can be inferred from the conduct of the parties. Thus offers can be the express or
implied. When R writes a letter to S offering to sell his car for Rs.2 lakh, it is an
express offer. If D purchases an air ticket and boards a flight to go to Delhi; it is a case
of an implied offer. The offer is made by the airlines company to take passengers to
scheduled places at scheduled fares.
Positive or Negative Offers: An offer to do something is a positive offer, whereas an
offer not to do something is a negative offer. For example, if C offers to sell his house
to D, it is a positive offer. If C offers not to interfere in B’s business if B agrees to
shift his place of business to another locality, it is a negative offer.
Counter-offer: A counter-offer is a situation wherein the offeree attempts to change
the terms of the offer initially made by the offeror. A counter-offer implies rejection
of the original offer. The consequences of a counter-offer can be seen in Hyde vs.
Wrench, involving some proposed negotiations between the defendant and the
plaintiff regarding a farm. Wrench offered to sell his farm for 1,000 pounds. Hyde
offered 950 pounds, which Wrench rejected. Hyde then informed Wrench that he
accepted the original offer. Such an acceptance is not binding as a counter-offer itself
implies the rejection of the original offer. In Stevenson vs. Mc Lean, it was observed
that a counter-offer must not be mistaken with a request for information. A request for
information can be accepted even after the new information has been provided.
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Acceptance
Acceptance is the next step of an offer. Unless and until an acceptance is
communicated to the offeror, it cannot be held as a valid and an effective acceptance.
Acceptance takes place only when the offeree gives his consent to the terms of the
offer. Just as in case of offer, acceptance may also be express or implied. An
acceptance is said to be express when it is communicated by words spoken or written
or by doing some required act. It is implied when it is to be gathered from the
surrounding circumstances or the conduct of the parties. In an auction sale, the highest
bidder is assumed to be the buyer of the goods once the deal is struck.
An acceptance must be clear and unconditional. The acceptance becomes invalid if the
terms of the offer differ from the original offer, at the time of acceptance or after
acceptance. An acceptance can be valid even after the difference in terms of original
offer, if the terms of counter-offer are acceptable to the original offeror. Counter-offer
terminates the original offer.
In order to convert an offer into a promise, acceptance should be absolute and
unqualified. It is also essential that the acceptance is given in some usual and
reasonable manner. If the offer prescribes the manner in which the acceptance is to be
given, then the acceptor should adhere to the prescribed mode. On failure to do so, the
offeror can insist that his offer will be accepted only if it is given in the prescribed
manner.
The following are the essential conditions for a valid acceptance:
 It must be made by the offeree or his agent.
 It should be absolute and unqualified.
 It shall be in a prescribed form.
 It should be within the specified time.
 Communication of acceptance.
 Acceptance during the course of negotiations.
 Acceptance must be positive.
Lapse and Revocation of Offer and Acceptance
An offer or acceptance extinguishes in some circumstances. The figure below states
the circumstances under which an offer lapses.
Figure 2
Making the Contract
Termination of Offer
Revocation Lapse of time Counter-offers Effect of death
General Unilateral contracts
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Lapse or Termination of an Offer

An offer may lapse under any of the following circumstances:
When the Offer is not Accepted in the Prescribed Mode: Section 7(2) of the Act
lays down that “In order to convert a proposal into a promise, the acceptance must be
expressed in some usual and reasonable manner, unless the proposal prescribes the
manner in which it is to be accepted. Thus, it is the responsibility of the offeror to
intimate to the offeree/acceptor, the mode of acceptance to be made. In case the
acceptor/offeree deviates from the prescribed mode and makes acceptance in an
alternative way and the offeror does not protest the deviation, he is deemed to have
accepted the new method of acceptance.
When it is not accepted within the Prescribed Time: An acceptance communicated
after the time prescribed by the offeror has lapsed then it cannot be termed as valid
acceptance. It cannot become valid even if the offer gets revived. Hence, such
acceptance, if accepted, cannot result in a valid contract.
However, if no time is prescribed, the acceptance has to be communicated within a
reasonable time. If an offer is not accepted within the reasonable period, then it lapses
at the end of such period. In case of perishable goods such as food, a “reasonable
time” would likely be in terms of days. The term “reasonable time” would be longer,
where the subject matter of the contract is a building.
By Rejection or Counter-Offer: If the offeree has rejected the offer, the offer
terminates. The offeree cannot subsequently accept an offer so rejected. When the
offeree makes a counter-offer or gives a conditional acceptance, it amounts to implied
rejection, thereby resulting in lapse of the original offer.
By Death or Insanity of Either Party to the Contract: An offer lapses if the offeror
dies or becomes insane before its acceptance and such a fact comes to the knowledge
of the offeree. Thus, an acceptance made in ignorance of the death or insanity of the
offeror, shall be a valid acceptance.
In Bradbury vs. Morgan, it was held that the deceased offeror’s estate is liable for the
acceptance rendered by him prior to his death. The court is of opinion that where an
acceptance is a valid contract then it cannot be revoked on the death of the offeror.
The substance of the contract is greater than its form. However, the same can be
revoked where the contract is entered on the basis of personal qualifications of the
offeror. The only remedy available here is to make an expression in the contract that
the contract gets terminated on the death of the either party.
By Revocation: The offer may be terminated by the offeror, if he informs the offeree
that he is withdrawing or revoking it. An offer may be withdrawn by the offeror at any
point of time before it is accepted, even though such offer is specified for a particular
period. This is known as ‘revocation of offer’.
By Subsequent Illegality or Destruction of Subject Matter: An offer lapses if the
subject matter is destroyed or becomes illegal, subsequent to making the offer but
before its acceptance.
On Failure to Fulfill a Condition Precedent to Acceptance: In State of Madhya
Pradesh vs. Gobardhan Dass the acceptance of a tender was to be accompanied by
payment of 25% of the amount. An omission by the successful tenderer to make the
requisite payment did not give rise to a binding contract between the parties.
Revocation of Acceptance
Section 5 of the Contract Act declares, “An acceptance may be revoked at any time
before the communication of the acceptance is complete as against the acceptor but
not afterwards.” Revocation of acceptance connotes the withdrawal of the acceptance
to a proposal by the offeree himself.
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12.4.2 Consideration
Section 25 of the Contract Act declares that, an agreement made without consideration
is void. No right of action arises out of an agreement not supported by consideration.
Ex nudo pacto non-oritur, nobody would part with anything unless he gets a proper
price. Hence, a contract without consideration raises a doubt as to its genuineness.
In Misa vs. Currie consideration has been defined as “the price for which a promise is
brought’. Consideration itself means “some right, interest, profit, or benefit accruing
to one party or some forbearance, detriment, loss of responsibility given, suffered or
undertaken by the other.”
Indian Law: Section 2(d) of the Indian Contract Act, 1872 defines consideration as
“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 act or abstinence or promise is called a consideration for
the promise.”
Consideration means the element of exchange in a bargain, in order to satisfy the
requirements of the governing law. Consideration is necessary for the formation of a
contract. Consideration need not be adequate. It is either a benefit to the promisor or a
detriment to the promisee, negotiated for and given in exchange for a promise. It must
have the exchange value that can be measured in terms of money or money’s worth.
12.4.3 Legality of Consideration and Object

Section 10 reads as follows:
All agreements are contracts if they are made by the free consent of parties competent
to contract, for a lawful consideration and with a lawful object-and are not hereby
expressly declared to be void.
Nothing herein contained shall affect any law in force in [India], and not hereby
expressly repealed, by which any contract is required to be made in writing or in the
presence of witnesses, or any law relating to the registration of documents.
Thus, all agreements are contracts if made for lawful consideration and with lawful
object.
Section 23 covers the illegality of both the object of the contract and the consideration
for it.
12.4.4 Intention to Create Legal Relationship

The validity of a contract is dependent on the intention of the contracting parties.
A contract will be valid only when the parties to the contract intend to create a legal
relationship between themselves. Non-existence of such an intention will not give to a
valid contract. Agreements of social nature do not contemplate legal relationship and
hence they are not contracts.
The test to determine the intention of the parties is objective and not subjective. Just
because the promisor contends that there was no intention to create legal relationship,
he would not be exempted from liability.
‘All contracts are agreements, but all agreements are not contracts.’ The basis for this
statement is that the existence of a mutual set of promises does not suffice for the
courts to accord legal recognition to such promises unless the intention to create legal
relations is clearly established.
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There is a large area of legal obligations imposed and enforced by law. Therefore,
obligation to look after wife and children, obligation to follow the law of the land or to
comply with orders of authorities do not fall within the ambit of the Law of Contract.
12.4.5 Capacity to Contract

One of the essentials of a valid contract, mentioned in Section 10, is that the parties to
the contract should be competent to make the contract. According to Section 11:
“Every person is competent to contract who is of the age of majority according to the
law to which he is subject and who is of sound mind and is not disqualified from
contracting by any law to which he is subject.”
Thus, the law of contract declares that a person competent to contract shall be:
 A major;
 Of sound mind; and
 Not disqualified under any existing law in force.
12.4.6 Free Consent of the Parties

The parties must have entered into the contract out of their own free will. Consent
implies agreeing upon the same thing in the same sense. According to Section 14 of
the Act, the consent is said to be free when it is not caused by:
 Coercion, as defined in Section 15, or
 Undue influence, as defined in Section 16, or
 Fraud, as defined in Section 17, or
 Misrepresentation, as defined in Section 18, or
 Mistake, subject to the provisions of Section 20-22.
12.4.7 Conclusion of Contract

A Contract is said to be ‘Concluded’ only when the acceptance of an offer is in a
detectable form. That means:
 Acceptance should be made only to the respective offer
 Acceptance rendered is not a conditional acceptance. It is an acceptance without
imposing any conditions.
 Offeree must be fully aware of the offer for which he rendered his acceptance.
Illustration: Kiran bids at a public auction. Can this be treated as a ‘Concluded
Contract’?
Solution: No, this cannot be treated as a concluded contract owing to absence of
acceptance from the auctioneer through any customary method.
12.4.8 Legal Formalities

A contract may be oral or in writing. Those contracts which require to be in writing
may even require registration. Therefore, where law requires an agreement to be put in
writing or be registered, the same must be complied with. For instance, the Indian
Trusts Act requires the creation of a trust to be reduced to writing.
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12.5 Certainty and Possibility of Performance

Section 37 of the Indian Contract Act provides as follows:
“The parties to a contract must either perform, or offer to perform their respective
promises, unless such performance is dispensed with or excused under the provisions
of this 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.”
Effect of incomplete performance by a party
Section 39 of the Act provides that –
“When a party to a contract has refused to perform or disabled himself from
performing its promise, in its entirety, the promisee may put an end to the contract
unless he has signified by words or conduct, his acquiescence in its continuance.”
According to Section 39 of the Contract Act, a breach of contract by the promisor may
arise in the following ways when –
 He refuses to perform the contract;
 He renders himself disabled to perform his obligation;
 He fails to perform; and
 By his conduct or action, it becomes impossible of performance.
Effect of prevention of performance by the promisee
Section 38 of the Act provides that –
“Where a promisor has made an offer of performance to the promisee, and the offer
has not been accepted, the promisor is not responsible for non-performance nor does
he thereby lose his rights under the contract.
Every offer must fulfil the following conditions:
 It must be unconditional.
 It must be made at a proper time and place, and 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 the whole of what he is
bound by his promise to do.
 If the offer is an offer to deliver anything to the promisee, the promisee must have
a reasonable opportunity of seeing that the thing offered is the thing, which the
promisor is bound by his promise to deliver.”
Doctrine of ‘Substantial Performance’
A contract has been substantially performed if the actual performance falls not far
short of the required performance and if the cost of remedying the defects is not too
great in amount in comparison with the contract price. For instance, if the builder has
acted in good faith and has completed the job in substantial compliance with the
contract, he can enforce the contract and collect the contract price. Any damages that
result from noncompliance can be collected by the buyer or deducted from the amount
of the contract price.
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Performance When “Time is the Essence of the Contract”

Section 55 of the Indian Contract Act recognizes time as an essence of the contract,
which means that in the performance of a contract the time factor will be given
priority by the parties. The parties intend to perform the contract exactly as per the
stipulated time alone. Such intention expressly gives a right to avoid the contract in
case of default or breach by any one of the parties.
Self-Assessment Questions – 1
a. ‘A’ accepts ‘B’s invitation to dinner by phone. Is this a contract?
b. Shyam advertises in a newspaper that he would pay Rs.5,000 to anyone, who

finds and returns his lost briefcase containing valuables. Does this constitute
a valid offer? Justify.
c. Ram communicates to Shyam that he will sell his car for Rs.1,50,000. Does
this constitute a valid offer?
12.6 Classification of Contracts/Agreements

Contracts are of different kinds and can be classified on different bases. Classification
may be based on the validity of the contracts, the mode of formation or the extent of
their performance. It can be understood by the following figure:
Figure 4
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ENFORCEABILITY
Valid Contracts
A contract which fulfills all the requirements prescribed by Section 10 of the Act is a
valid contract.
Illustration: A agrees to sell 10 bags of rice to B for Rs.10,000 by the end of May. B
accepts. This is a valid contract.
Void Contracts
Section 2(g) of the Act defines a void contract as, “An agreement not enforceable by
law is said to be void”. A contract may be void ab initio (from the inception) or may
be rendered void subsequently.
Voidable Contracts
According to Section 2(i) of the Act, “An agreement which is enforceable by law at
the option of one or more of the parties thereto, but not at the option of the other or
others, is a voidable contract”. A contract that is not enforceable by both the parties is
a void contract. But a contract that is enforceable by one and not by the other is
voidable.
Unenforceable Contracts
If a contract is not enforceable in the court of law then such contract is an
unenforceable contract.
Illegal Contacts
The contract is illegal if the object or consideration of that agreement is unlawful for
any of the reasons such as forbidden by law, defeats the provisions of law, fraudulent,
immoral etc.
METHOD OF FORMATION
Simple Contracts
All contracts other than formal contracts are simple contracts. Based on their mode of
creation they may be classified as express contracts, implied contracts, quasi
contracts, standard form contracts and contingent contracts.
Express Contracts: Contracts which are made orally or in writing are called express
contracts. Thus a telegram by A offering to sell a car at affixed rate to B and a return
telegram by B accepting the same is an express contract.
Implied Contracts: A contract is said to be implied or tacit when it can be inferred
from the conduct of the parties. Keeping our belongings in the cloak room for safe
custody is an implied contract.
Quasi Contracts: These are agreements which are ascribed the nature of contract by
the law. Where no express or implied contract exists between the parties, the law
creates and enforces legal rights and obligations under certain circumstances. These
obligations are known as quasi contracts. Sections 68 to 72 of the Indian Contract Act
deal with quasi contracts. A quasi contract rests on the doctrine of unjust enrichment
that a person shall not be allowed to enrich himself unjustly at the expense of another.
The obligations in a quasi contract are not the result of an agreement; they only
resemble the obligations that arise from contracts. For example, necessaries supplied
to a minor are treated as quasi contracts so as to enable others to enter into agreements
with minors. Otherwise no person shall come forward to render any service to the
minors as they would be agreements void ab initio.
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Standard Form Contracts: Standard form contracts have printed forms of

standardized contracts containing a number of terms and conditions. The individuals
entering into such contracts can hardly negotiate and they have to accept the terms and
conditions already mentioned. Ex: Life Insurance Corporations, Railways, Unit Trust
of India etc., wherein similar nature of contracts are agreed with so many people.
Contingent Contracts: Section 31 of the Act provides for such contracts which are
collateral to do or not to do something, if some event, collateral to such contract, does
or does not happen. In Muthu vs. Secretary of State, a person was the highest bidder
for a house which was put up for sale. However, one of the conditions was that the
sale could be confirmed only if the collector authorizes it. The collector declined to
confirm the sale. It was held that there was no contract.
The event on which the happening of the contract is dependent should be uncertain.
Further, the event should be collateral to the contract. The event should not form part
of the consideration of the contract though the contract is made to depend upon it.
Contracts of indemnity and insurance are examples of contingent contracts. Section 32
to Section 36 specifies the rules that are applied in evaluating whether a contract is a
contingent contract or not.
EXTENT OF PERFORMANCE
Executed Contract
An executed contract is a contract concluded in toto. For instance, A agrees to pay B,
a film actress, Rs.10,000 for an appearance at a stage show conducted by him. A pays
the amount after B makes an appearance. This is an executed contract.
Executory Contract
An executory contract is one in which both the parties may agree to do something in
the future or one of the parties has performed his part of the contract and the other
party has yet to perform his part of the promise.
OBLIGATION TO PERFORM
Unilateral Contracts
A unilateral contract is a contract where the obligation to perform remains only on one
party to the contract, the other party already having performed his part of the contract.
Most of the implied contracts are unilateral contracts. For instance where a person
enters a hotel and pays money for his lunch in advance, he has performed his promise.
It is for the hotel personnel to serve him lunch when he takes a place in the dining
hall.
Bilateral Contracts
In a bilateral contract obligation rests upon both the parties to the contract to perform
their promise. The promise may be to do or refrain from doing some act. In these
contracts both can sue the other for breach of contract. This category comprises of
executed and executory contracts.
12.7 Void Agreements

An agreement expressly declared to be void under the Contract Act or any other law,
is not enforceable and is, thus, not a contract.
Section 2(g) of the Act defines a void agreement as, “An agreement not enforceable
by law is said to be void.” A contract may be void ab initio (from the inception) or
may be rendered void subsequently. A valid contract may be made void by some
12
subsequent impossibility or when a voidable contract is made void by the aggrieved

party. For instance, where the consent of the aggrieved party was not a free consent,
the contract becomes void though at the beginning it was an enforceable contract.
Following are the instances of void agreements:
Figure 3: Void Agreements
Agreements by incompetent parties (Section 11)
Agreements under mutual mistake of fact material to the agreement (Section 20)
Agreements with unlawful consideration or object (Section 23):
– immoral and illegal agreements

– agreements opposed to public policy
Agreements unlawful in part (Section 24)
Agreements without consideration (Section 25)
Agreements in restraint of marriage (Section 26)
Agreements in restraint of legal proceedings (Section 28)
Agreement which are uncertain and ambiguous (Section 29)
Agreement by way of wager or wagering agreements (Section 30)
Agreements to do Impossible Acts (Section 56)
The above agreements are explained below in detail:

AGREEMENTS BY INCOMPETENT PARTIES (SECTION 11)
The agreements entered into by the following three categories of persons are void:
 A person who has not attained the age of majority, i.e., one who is a minor.
 A person who is of unsound mind.
 A person who has been disqualified from contracting by some law.
AGREEMENTS UNDER MUTUAL MISTAKE OF FACT MATERIAL TO
THE AGREEMENT (SECTION 20)
An agreement is void where the parties to an agreement are under the mistake of fact
which is of primary importance or subject to the contract.
Illustration:1. A agrees to sell to B a specific cargo of goods supposed to be on its
way from England to Bombay. It turns out that, before the day of the bargain the ship
conveying the cargo had been cast away and the goods lost. Neither party was aware
of these facts. The agreement is void.
AGREEMENTS WHICH RENDER THE CONSIDERATION/OBJECT
UNLAWFUL (SECTION 23)
The object of an agreement is lawful, unless it:
 Is forbidden by law; or
 Is of such nature that, if permitted, it would defeat the provisions of law; or
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 Is fraudulent; or
 Involves or implies injury to the person or property of another; or
 The court regards it as immoral, or opposed to public policy.
The Object/Consideration is Forbidden by Law
According to Section 23, where the object/consideration of an agreement is forbidden
by law, the agreement is unlawful.
Illustration: The sale of liquor without license is illegal.
Solution: The sale is void and the price is also irrecoverable.
Object/Consideration/Performance Defeats the Provisions of Law
Where the object of or the consideration for an agreement is such that though not
directly forbidden by law, it would, if permitted, defeat the provisions of some law,
such an agreement is also void.
Illustration: ‘Mr. Old man takes a seat in a public bus. His act is voluntary.’ Is his
voluntary act is questionable under the Indian Contract Act, 1872?
Solution: No. His Act is not questionable in terms of Indian Contract Act, 1872.
Because, there exists an implied offer to public at large by a transport company to
carry passengers from one place to another. When Mr. Old man took a seat in a public
bus, it means an implied acceptance of an offer is rendered by him to the company.
Being both offer and acceptance is lawful, the contract between the parties is a valid
contract. The case holds good in terms of section 9 of the Indian Contract Act, 1872.
Object/Consideration are Fraudulent
An agreement made for a fraudulent purpose is void.
Illustration: Mr. Bell, well established doctor, has been fighting a long drawn
litigation with Mr. Cell, another well established doctor. To support his legal
campaign Mr. Bell hires the services of Mr. Well, a legal expert, stating that an
amount of Rs.5 lakhs would be paid if Mr. Well does not take up the case of Mr. Cell.
Mr. Well agrees. However, at the end of the litigation, Mr. Bell refuses to pay. Decide
whether Mr. Well can recover the amount promised by Mr. Bell in terms of the
provisions of Contract Act, 1872?
Solution: Mr. Well cannot recover the amount from Mr. Bell because the contract
entered by them is for an unlawful purpose which is not enforceable in the court of
law.
Object/Consideration are Injurious to any Person or Property
If the object or consideration of an agreement is injurious to the person or property of
another, it is a void agreement and is unlawful.
Illustration: Mr. Nice agreed to become an assistant for 5 years to Mr. Perfect, who
was a chartered accountant, practicing at Hyderabad. It was also agreed that during the
term of agreement Mr. Nice will not start his own practice at Hyderabad. However, at
the end of one year, Mr. Nice left the assistantship of Mr. Perfect and began doing his
own practice at Hyderabad. Can Mr. Perfect restrain Mr. Nice from carrying out his
practice, taking the help of Indian Contract, Act, 1872 provisions?
Solution: Mr. Perfect can restrain Mr. Nice from carrying out his own practice at
Hyderabad. Any agreement of service through which a person agrees not to take up
any service with anyone else for a specified term is a valid contract in the eyes of law
because it may pose direct competition to his employer’s business.
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Object/Consideration is Immoral
When in an agreement the object or consideration is immoral, it cannot be enforced.
These include generally sexual immorality, interference with marital relations, acts
against good public morals etc.
The Object/Consideration is Against Public Policy
An agreement is unlawful if the court regards it as ‘opposed to public policy.
Illustration: Mr. Bad and Mr. Unkind are partners in a partnership firm. They came to
a consensus to defraud the government department by sending the tenders in
individual names in place of their firm’s name. Is this consensus becomes a valid
contract?
Solution: it is not a valid contract, because defraud the government department means
defrauding the state at large which is against the interests of the public policy.
AGREEMENTS THAT IS UNLAWFUL IN PART (SECTION 24)
Section 24 of the Indian Contract Act says:
Agreements are void, if considerations and objects are unlawful in part – If any part of
a single consideration for one or more objects, or any one or any part of any one of
several considerations for a single object is unlawful, the agreement is void.
Where the object or consideration is illegal in part and is not severable from the rest
the whole agreement is void. Section 24 comes into play when a part of the
consideration for an object or more than one object of an agreement is unlawful. The
whole of the agreement would be void unless the unlawful portion can be severed
without damaging the lawful portion.
Illustration: A promised to superintend on behalf of B, the manufacture of Indigo,
which was legal and also certain other illegal business. B agreed to pay him a
consolidated salary of Rs.15,000. The agreement was void. A had made two promises
but got one consideration. If the salary had been promised for the two promises
separately, then the legal part would have been valid and recoverable.
AGREEMENTS WITHOUT CONSIDERATION (SECTION 25)
Any agreement which does not have consideration is void unless:
 It is made on account of natural love and affection between parties standing in a
near relation to each other; or
 If it is a promise to compensate wholly or in part, a person who has already done
voluntarily something for the promisor (past consideration), or
 If it is a promise to pay a time-barred debt.
Illustration: If A promises to pay B Rs.100 for nothing and B neither does nor
promises to do anything in return to compensate A for the money paid by him, A’s
promise has no force in law.
AGREEMENTS IN RESTRAINT OF MARRIAGE (SECTION 26)
Every agreement in restraint of the marriage of any person, other than a minor, is void
(Section 26).
The restraint may be partial or general.
Illustration: Two widows (of the same deceased husband) agree that if any one of
them remarries, she must forfeit her right of share in the deceased husband’s property.
This kind of agreement is not in restraint of marriage and has been upheld by the
court, which stated that nothing in the agreement reflected that restraint was imposed
upon either of the two widows to ‘remarry’.
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AGREEMENTS IN RESTRAINT OF TRADE (SECTION 27)

According to Section 27 of the Indian Contract Act, every agreement, by which
anyone is restrained from exercising a lawful profession, trade or business of any
kind, is void to that extent.
Illustration: In Madhub Chander vs. Raj Coomar, there were two rival shopkeepers in
a locality and one of them agreed to pay a sum of money to the plaintiff if he would
close the business in that area. The plaintiff accordingly did so, but the defendant
refused to give any money to him. The court held the agreement to be void.
Exceptions to Section 27 of the Act
There are two kinds of exceptions to the rule,
 Those created by statute; and
 Those arising from judicial interpretations of Section 27.
AGREEMENTS IN RESTRAINT OF LEGAL PROCEEDINGS (SECTION 28)
Any clause in the agreement restraining either of the party to enforce his agreement is
void. Section 28 does not apply to the agreements which restrict the enforcement of
legal right partially.
The following agreements are declared as void under Section 28:
 Agreement which restricts absolutely the parties from enforcing their legal rights
under a contract, and
 Agreement which limit the time within which a party may enforce his contractual
rights.
Illustration: If A and B agree that A will never realize the price by a suit in any court,
that agreement is void.
Illustration: A has supplied goods to B. If A promises that he will not sue B after a
period of two years or if A fails to sue within 2 years he will have no right to sue.
Such an agreement is void.
Exceptions to Section 28 of Indian Contract Act
There are two exceptions to the rule that an agreement in restraint of legal proceedings
is void. These are:
 Reference of future disputes to arbitration; and
 Reference of existing disputes to arbitration.
This section does not make such of those contracts void wherein two or more persons
agree that any dispute which may arise between them shall be referred to arbitration
and also the amount awarded in the arbitration shall only be recoverable.
AGREEMENTS WHICH ARE UNCERTAIN AND AMBIGUOUS (SECTION 29)

Any agreement the meaning of which is not certain or capable of being made certain,
is void. This provision is explained in Section 29 of the Indian Contract Act, 1872.
In Guthing vs. Lynn A horse was bought for a certain price coupled with a promise to
give 5 pounds more if the horse proved lucky. The agreement was held to be void for
uncertainty. The court had no machinery to determine what luck, bad or good, the
horse has brought to the buyer. Such cases have generally arisen in connection with
the sale of goods, bearing uncertainty as to the price.
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AGREEMENTS TO DO IMPOSSIBLE ACT (SECTION 56)

According to Section 56 of Indian Contract Act, “An agreement to do an act which is
impossible to perform is void.”
“Where one person has promised to do something which he knew or with reasonable
diligence, might have known that the promise is impossible or unlawful, such
promisor must make compensation to such promisee for any loss which the promisee
sustains through the non-performance of the promise.”
Illustration: A agrees with B to discover treasure by magic. The agreement is void. A
already married to C contracts to marry B while polygamy is forbidden by law. A
must make compensation to B for loss caused to her by non-performance of the
promise.
Figure 5
a. ‘An agreement collateral to a wager.’ Is this agreement void?
b. Agreement in restraint of carrying of trade after sale of goodwill. Can this

agreement be considered as an agreement in restraint of trade?
c. Compensation for voluntary services. Is this agreement without consideration

void?
d. A supplied goods to B. A promises B that he will not sue B after a period of 3

years. Is the agreement valid?
Source: Nirmal Singh. Business Laws.
12.8 Remedies for Breach of Contract

A condition is a major term of the contract. In the event of a breach, the injured party
is entitled to rescind the contract and to claim damages.1 The right to rescind is lost in
the same way as in cases of misrepresentation.
1
Wallis sons and Webb vs. Pratt & Haynes (1910).
17
The innocent party is always entitled to affirm the contract. In such a case, he will still
be entitled to damages, but not to treat the contract as at an end.
Illustration: A hired B’s ship to carry cargo from Russia. Later, B repudiated the
contract.
A delayed a decision as to whether to treat the contract as at an end or sue for
damages, hoping that B would change his mind. War then broke out between Great
Britain and Russia before the performance date, thus frustrating the contract. It was
held that A had kept the contract alive by his actions, which led to the frustration of
the contract. As such he had lost his right of action (Avery vs. Bowden).
The law has provided certain remedies to the aggrieved party in case of breach of
contract by the other parties. The important feature in the event of breach of contract
is that each party has a responsibility to mitigate its losses at a minimum possible
level.
When a contract is broken, the injured party has one or more of the following
remedies:
 Suit for Rescission,
 Suit for Injunction,
 Suit for Specific Performance,
 Suit for Damages,
 Penalty by Courts, and
 Suit for Quantum Meruit.
These remedies are discussed below:
12.8.1 Suit for Rescission

When a contract is broken by one party, the other party may sue to treat the contract
as rescinded and refuse further performance. The aggrieved party may need to
approach the court to grant him a formal rescission, i.e. cancellation of the contract.
This will enable him to be free from his own obligations under the contract.
Thus formal declaration of rescission clears the way for other consequences to take
effect following the breach of contract.
12.8.2 Suit for Injunction

Injunction is the order from a court that prohibits a party to do or refrain from doing a
certain act. This is available in contract actions in only limited circumstances. Such an
order of injunction from a court that is granted at the instance of the aggrieved party
against the person who has breached the contract acts as remedy and makes the guilty
party refrain from doing or not doing precisely the act, which is causing the breach of
contract.
Illustration: R enters into an agreement with M to present an entertainment program at
M’s hotel on the eve of the New Year’s Day. Later, R enters into another agreement
with N to conduct the same type of performance at the same time at N’s hotel. M
treats it as an anticipatory breach of performance on the part of R and seeks for an
injunction from the court. The court may pass an injunction order against R not to
present the program at N’s hotel at that time.
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12.8.3 Suit for Specific Performance

“Specific performance” means doing exactly what had been intended to be done by the
parties in the contract. The specific performance is the remedy granted by the courts to
the aggrieved party in equity only in cases where it is absolutely essential to grant it.
Illustration: If A agrees to sell a house to B, B can enforce the contract specifically. So
A will be required to convey the house to B. This remedy is granted because the court
finds that the remedy of damages is not an adequate remedy in such a case.
12.8.4 Suit for Damages

Damages are a monetary compensation allowed to the injured party by the court for
the loss of injury suffered by him by the breach of a contract. The object of awarding
damages for the breach of a contract is to put the injured party in the same position, so
far as money can do it, as if he had not been injured i.e., place him in the position in
which he would have been had there been performance and not breach. This is called
as “the doctrine of restitution (restitution in integrum).”
Hadley vs. Baxendale – (The rule of remoteness and special circumstances).
A broken shaft was given to a carrier to bring it to a repair shop. The carrier was not
told that the absence of the shaft would completely stop the work of the owner. The
carrier was in breach of contract because the delivery was delayed by several days.
Admitting to damages, the defendant nevertheless argued that the loss of profit
damages were too remote.
Damages can be classified under the following types based on the courts’ judgments
and the provisions of Section 73 of the Indian Contract Act, 1872 and also depending
upon the circumstances of the case.
 General damages or Ordinary damages;
 Special damages;
 Exemplary or vindictive or punitive damages; and
 Nominal damages.
The details of the above types of damages are discussed below:
General or Ordinary damages
The losses that naturally and directly arise out of the breach of the contract in the
usual course of the things are called as general damages. They would be the
unavoidable and logical consequence of the breach. The damages for such losses are
called as general damages or ordinary damages.
Special Damages
Special damage is what arises in the peculiar circumstances of a particular case, quite
apart from the usual course of things. While making the contract, one party to the
contract may bring to the notice of the other party about the particular type of losses
that he would suffer under certain special circumstances. In case the contract is not
performed properly and if the other party still proceeds to make the contract, it is
construed that the other party has expressly agreed to be responsible for the special
losses that may be caused by improper performance of his obligation. Compensation
for such special losses is called as “special damages.”
Illustration: M told C that there should not be any delay in the performance of the
contract i.e., repairs to be made to the specified machinery, as his business would be
affected and he would incur losses for any delay by the latter and C has promised not
to cause delay. This would imply that C has agreed to become liable for the special
losses that may be caused by means of the improper performance of his obligation.
Compensation for such losses are called as ‘special losses’.
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Indirect Damages (Loss of Profits)

The following illustration shows the nature of the indirect damages:
“A delivers to B, a courier company, a machine to be delivered overnight to A’s
factory. B does not deliver the machine on time, and A, in consequence, loses a
profitable contract with the Government. A is entitled to receive from B, by way of
compensation, the average amount of profit which would have been made by the
working of the factory during the time that delivery of it was delayed, but not the loss
sustained through the loss of the Government contract.”
The leading case on this subject is that of Hadley vs. Baxendale2. Section 73 and
various cases clearly provide that knowledge of circumstances leading to loss of
profits to the plaintiff imposes liability on the defendant.
Exemplary or Vindictive Damages
The principle underlying the award of damages is compensation to the aggrieved
party. But, law generally would find it difficult to heal the mental pain or suffering or
sense of humiliation that may be caused to the aggrieved party by the breach. In two
exceptional cases, the courts award damages that can be punitive. i.e., by way of
punishment. These are: (1) Breach of promise to marry, (2) Bank dishonoring a
customer’s cheque, though customer has sufficient funds in his account. Damages
awarded in these two exceptional cases are called exemplary damages or vindictive
damages.
Nominal Damages
Sometimes the breach of a contract does not cause any loss. Still the breach of a
contract being a wrong, the seller can recover damages in a technical sense. The
damages awarded in such a case are called nominal damages (for example, one rupee
or even one pie).
Liquidated Damages
Such an amount that is specifically mentioned in the contract by the parties
themselves to be payable to the aggrieved party in case towards the breach, is also
called as liquidated damages.
Usually it is for the court to determine the quantum of damages.
In Mehta & Sons vs. Century Spinning and Manufacturing Co.3, the plaintiff claimed
damages for premature termination by the defendant company of the plaintiff’s
service as managing agents. They claimed as damages 10% of the gross profits of the
company, (which was their remuneration as managing agents under the Managing
Agency Contract) for unexpired period of the contract of service.
12.8.5 Suit for Quantum Meruit

Quantum meruit means, simply, “for what it’s worth.” Quantum meruit also means
“as much as he deserves.” Even where there is no contract, per se, there may be a
cause of action where a person gives value to another under circumstances that would
cause the first person (if reasonable) to believe the second person will give fair market
value for what he received.
The term quantum meruit actually describes the measure of damages for recovery on a
contract that is said to be “implied in fact’’.
2
9, Ex. 341: 96 R.R. 742.
3
(1962) SC 1314.
20
Since specific terms in an implied contract are absent, the law supplies the missing
contract price by asking what one would have to pay in the open market for the same
work. Thus the measure of damages under quantum meruit is defined as “the
reasonable value of the labor performed and the market value of the materials
furnished” to the project.
a. What type of damages are awarded in case of breach of a promise to marry?
b. Michel, a popular singer, enters into a contract with the manager of a theatre, to
sing at the theatre two evenings a week for the next two months and the
manager of the theatre agrees to pay him at the rate of Rs.1,000 for each
performance. From the sixth evening onwards, Michel absents himself from the
theatre. In this context, which of the following remedies is/are available to the
manager of the theatre against Michel?
c. Govind agrees to sell a house to Arvind and a contract is entered into.

However, Govind subsequently refuses to sell. Arvind approaches the court.
What type of remedy can the court award if it finds that the remedy of damage
is not adequate in this specific case?
12.9 Summary
A contract creates self-imposed obligations. It establishes the reciprocal
responsibilities of the parties and the extent and standard of their performances.
Further a contract also facilitates the allocation of burden of risk in case of any
contingency in advance. Finally, it also makes allowance for any loss arising out of
any mishap or non-happening of any event.
The essential elements of a valid contract are Offer and Acceptance, Free Consent,
Capacity, Consideration, Lawful Object, Certainty and Possibility of Performance, a
clear term of contract.
Classification of contracts may be classified into valid, voidable, void, unenforceable
and illegal contracts based on the validity of the contracts. Contracts are classified into
formal and simple contracts based on the mode of formation. Contracts can be
classified as executed and executory contracts based on the extent of their
performance.
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The law has provided certain remedies to the aggrieved party in case of breach of
contract by the other parties. The important feature in the event of breach of contract
is that each party has a responsibility to mitigate its losses at a minimum possible
level.
There are five remedies available for breach of contract: they are damages, specific
performance, Injunction, Quantum Meruit and Rectification. The Court awards
damages in order to put the injured party into the position he would have been in, if
the contract had been performed so far as money can make this possible.
12.10 Glossary
 Ab inito is a latin word that means ‘from the beginning’.
 Bona fide is a good faith, honestly, without fraud, collusion or participation in
wrongdoing.
 Breach of Contract is a legal claim that one party failed to perform as required
under a valid agreement with the other party.
 Consensus Ad Idem is a true meeting of minds between the parties on all the
terms of the contract.
 Damages mean the money awarded in a law suit to one party based on injury or
loss caused by others.
 Estoppel is a concept that prevents a party from acting in a certain way because it is
not equitable to do so. The concept of estoppel is applied in several areas of law.
 Restitution means compensation for loss or injury.

 Anson’s Law of Contract.
 Prof. G C V Subba Rao, Law of Contracts I and II.
 http://www.questia.com/search/contracts
 http://www.barristerbooks.com
 jurist.law.pitt.edu

a. A legal obligation having its source in an agreement only will give rise to a
contract. The agreement ‘A’ accepts ‘B’s invitation to dinner by phone’
indicated is a social agreement and does not give rise to any legal consequences.
b. Shyam advertises in a newspaper that he would pay Rs.5,000 to anyone, who
finds and returns his lost briefcase containing valuables. This is not a valid offer.
It is only an example of invitation to offer.
c. When Ram communicates to Shyam that he will sell his car for Rs.1,50,000.
This is a valid offer.
a. No. An Agreement collateral to a wager is not void. Only agreements by way of
wager are void and no suit shall be brought for recovering anything alleged to be
won on any wager.
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b. Public policy requires that every man should be at liberty to work for himself
and an agreement which interferes with the liberty of a person to engage himself
in any lawful trade is referred to as ‘an agreement in restraint of trade’. An
exception to this rule is the sale of goodwill. A seller of goodwill of a business
may be restrained from carrying on a similar business subject to certain
conditions.
c. No. The general rule of law is that an agreement without consideration is void. A
promise to pay for a past voluntary service is binding and is an exception to
agreements without consideration. (Section 25)
d. No. The agreement is void. Every agreement by which any party thereto is
restricted absolutely from enforcing his rights under or in respect of any contract
is void and falls under the category of ‘Agreements in restraint of legal
proceedings (section 28).
a. Exemplary or vindictive damages are to be awarded for breach of a promise to
marry. The courts would award a large amount as damages to the aggrieved
party which could cause a certain degree of discomfort to the guilty person.
b. He is at liberty to put an end to the contract, and also entitled to compensation
for the damages sustained by him through Michel failure to sing from the sixth
evening onwards.
c. Where the court finds that the remedy of damages is not adequate remedy, the
court can enforce the contract specifically. Specific performance means doing
exactly what had been intended to be done by the parties in the contract. Courts
grant this to the aggrieved party in equity only in cases where it is absolutely
essential to grant it.

A. Multiple Choice
1. Which of the following statements construe(s) an offer?
a. Display of various varieties of silk sarees with prices marked upon them by
a cloth shop owner.
b. A publishing company provides a catalogue with prices indicated on it for
sale of books.
c. An auctioneer placed an advertisement in the newspaper to sell a car.
d. Ram informs Shyam that he wants to sell his Bajaj Scooter for Rs.8,000.
e. All of the above.
2. Which of the following agreements is/are valid?
a. Agreement in restraint of legal proceedings.
b. Agreement curtailing period of limitation.
c. Agreement to stifle prosecution.
d. Agreement by an outgoing partner with his partners not to carry on any
business within a specified period or within specified local limits.
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3. Under which of the following modes is a contract said to have been discharged by
operation of law?
a. Performance of the contract by both the parties.
b. Mutual consent of both the parties.
c. Lapse of time in performance of the contract.
d. Insolvency of either of the parties.
e. Breach of contract by either of the parties.
4. The contract entered with a lunatic during the times of his sound mind is
a. Valid
b. Void
c. Void abinitio
d. Viodable
e. Not enforceable.
B. Descriptive
1. To be enforceable by law an agreement must consists of an offer and acceptance
by competent parties, is there any exceptions to the above principle, Explain.
2. State the various acts which constitute fraud as set out under section 17 of the
Indian Contract Act, 1872.
3. Describe in detail the suit for Quantum Meruit.
These questions will help you to understand the unit better. These are for your
practice only.
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Unit 13
Special Contracts
Structure
13.1 Introduction
13.2 Objectives
13.3 Contracts of Indemnity
13.4 Contracts of Guarantee
13.5 Letter of Credit Contracts
13.6 Contract of Bailment
13.7 Contract of Pledge
13.8 Contracts of Agency
13.9 Employment Contracts
13.10 Special Rights in Contracts
13.11 Drafting of Contracts
13.12 Summary
13.13 Glossary
13.1 Introduction
In our earlier unit we have learnt the general principles and rules governing contracts.
In this unit we shall deal with contract of agency, indemnity and guarantee, bailment
and pledge which are contracts of special type.
Contracts of indemnity and guarantee are dealt under sections 124 to 147 of the Indian
Contract Act, 1872. Indemnity in general is the protection given against loss or a
security against or compensation for loss. The law relating to agency is dealt in
sections 182 to 238. An agent is a connecting link between the principal and third
parties as it is very difficult to attend all matters personally, wherever necessary, to
bring the legal relations in this complex modern business world. Additionally, this
unit also deals with essentials of employment contracts and documentation of
commercial contracts.
13.2 Objectives
After going through the unit, you should be able to:
 Differentiate between contract of indemnity and guarantee;
 Recall the different kinds of guarantee, rights of surety and discharge of surety’s
liability;
 Familiar with the concept of bailment and pledge
 Describe the different ways of creation of agency, the rights and duties of
principal and the modes of termination of agency;
 Describe the conditions in an employment contract;
 State the special rights enjoyed by parties in a contract; and
25
 Know the mode of drafting the contracts.

 Understand the important clauses/ terms of contracts
13.3 Contracts of Indemnity

According to Section 124 of the Indian Contract Act, 1872 a contract by which one
party promises to save the other from loss caused to him by the conduct of the promisor
himself or by the conduct of any other person, is called a ‘contract of indemnity’.
A contract of insurance is an example of a contract of indemnity according to English
Law. In consideration of a premium the insurer promises to make good the loss
suffered by the assured on account of the destruction by fire of his property insured
against fire. The person who promises or makes good the loss is called the indemnifier
(promisor) and the person whose loss is to be made good is called the indemnified or
indemnity holder (promisee).
However, a contract of life insurance does not come under the category of a contract
of indemnity. This is because, in the case of life insurance, the insurer agrees to pay a
certain sum of money either on the death of a person or on the expiry of a stipulated
period of time. The question of having suffered a loss does not arise. Moreover, as the
life of a person cannot be valued, the whole of the sum assured becomes payable and
for that reason also it is not a contract of indemnity.
The contract of indemnity in a real sense is a contingent contract. It must have all
essentials of a valid contract. It can be expressed or implied. It is relevant to discuss
the following cases in this regard.
Certain rights have been granted to the indemnity holder under Section 125.
13.3.1 Rights of Indemnity Holder when Sued

The promisee in a contract of indemnity, acting within the scope of his authority, is
entitled to recover from the promisor:
 All damages within the scope of the terms of the indemnity;
 All costs which he may be compelled to pay in any such suit if, in bringing or
defending it, he did not contravene the orders of the promisor and acted as it
would have been prudent for him to act in the absence of any contract of
indemnity, or if the indemnifier authorized him to bring or defend the suit;
 All sums to be paid under the terms of any compromise of any such suit, provided
the compromise is not contrary to the orders of the indemnifier, and should be
authorized by him.
13.4 Contracts of Guarantee

Section 126 deals with Contract of Guarantee. As per this Section ‘contract of
guarantee’ is a contract to perform the promise, or discharge the liability of a third
person in case of his default. The person who gives the guarantee is called the
‘surety’, the person in respect of whose default the guarantee is given is called the
‘principal debtor’, and the person to whom the guarantee is given is called the
‘creditor’. A guarantee may be either oral or written.
The purpose of a contract of guarantee is to provide additional security to the creditor
in the event of default by the principal debtor. In a contract of guarantee, there are
three parties i.e., the creditor, the debtor and the surety. Also, there are three contracts
in a contract of guarantee (i.e., between the creditor and the debtor, between the
creditor and the surety and between the debtor and the surety).
26
Unit 13: Special Contracts
If the debt to be guaranteed is already time barred, guarantee given will not be valid
and the surety will be discharged from his liability.
13.4.1 Types of Guarantees

A guarantee may be specific or continuing.
Specific Guarantee
A specific guarantee covers only one transaction or objective, is limited to a certain
sum of money and is limited as to time. Any amount paid towards the advance by the
borrower in his debt account with the creditor will go to reduce the guarantor’s
liability.
Continuing Guarantee
A continuing guarantee is defined in Section 129 of the Indian Contract Act. It covers
a series of transactions; subject to the limit as mutually agreed upon, irrespective of
the payments towards the advance and irrespective of the fluctuations of the balance
in the debtor’s account between debit and credit. Whether a guarantee is a continuing
guarantee or not depends upon the construction of the document. If there are several
documents covering a debt and guarantee, all the documents must be read as whole. In
case of ambiguity in the contract, the nature of the contract is to be determined basing
upon the surrounding circumstances.
In Nottingham Hide Co. vs. Bottrill1 it was held that the following words used in a
guarantee made the guarantee a continuing one: “Having every confidence in him, he
as but to call on us for a cheque and have it with pleasure for any account he may have
with you and when to the contrary we will write to you.”
Methods of Revocation of Continuing Guarantee: A continuing guarantee may be
revoked in two ways:
 By the surety giving notice oral or in writing to the creditor as to future
transactions (Section 130), and
 In the absence of a contract to the contrary, by the death of the surety as to future
transactions, (Section 131).
Mrs. C issued a bank guarantee for the bank loan of Mr. D. Subsequently, she expired.
Her legal representatives argued that she is no more held liable for such guarantee
owing to her death. The bank argued that she is held liable for such guarantee in
respect of all transactions taken place based on such guarantee prior to her death.
Because there is no revocation of guarantee placed on records from her side at any
time before her death. The parties knocked the court’s door for justice. The court held
that judgment in favor of bank honoring the provisions of section 130 and 131 of the
Indian Contract Act, 1872. [Shri Rajan Gupta vs. Bank of India and Another (2007)].
13.4.2 Liability of Surety

According to Section 128, the liability of the surety is co-extensive with that of the
principle debtor, unless otherwise provided by the contract.
It has been specifically provided in the contract that the surety’s liability arises only
when the principal debtor is made liable, the surety continues to be liable in the given
instances:
 Death of the principal debtor;
 Discharge of the principal debtor’s liability by operation of law;
1 (1873) L.R.8 C.P 694
27
 Creditor’s failure to sue the principal debtor within the period of limitation; and
 Release of one of the co-sureties by the creditor.
13.4.3 Discharge of Surety

By Revocation
 A continuing guarantee can be revoked by the surety any time by giving notice to
the creditor. However, the surety will remain liable for those transactions prior to
the revocation.
 By death of the surety so far as future transactions are concerned. However, the
surety’s liability will not be discharged even on his death, in case there is a
contract to that effect.
 By Novation – where a new contract substitutes the old contract by which the
liability under the old contract stands cancelled.
By Conduct of the Creditor
 Any variance made without the surety’s consent, in the terms of the contract
between the principal debtor and the creditor, discharges the surety as to
transactions subsequent to the variance.
 The validity of a contract of guarantee will not be affected in case there is a
written contract of guarantee and there is no variance of the same in writing.
 Where the creditor enters into an agreement with the principal debtor releasing
him from his liability, the surety stands discharged.
The following illustration aptly discusses this:
‘A’ gives guarantee to ‘C’ for goods to be supplied by ‘C’ to ‘B’. ‘C’ supplies goods
to ‘B’, and afterwards ‘B’ becomes embarrassed and contracts with his creditors
(including C’s) to assign to them his property in consideration of their releasing him
from their demands. Here, ‘B’ is released from his debt by the contract with ‘C’, and
‘A’ is discharged from his surety ship.
By Invalidation of Contract
 A guarantee obtained by means of either misrepresentation or concealment of
material fact which the creditor was aware of, at the time of entering into the
contract, invalidates the guarantee and discharges the surety.
 Where there is no consideration between the creditor and the principal debtor, the
surety is discharged.
 Where a person gives guarantee on the condition that the creditor shall not act
upon it until another person joins in as co-surety, the guarantee is not valid if that
other person does not join.
13.4.4 Bank Guarantee

A bank guarantee is a guarantee given by a bank to a third person, usually a creditor,
to pay him a certain sum of money on behalf of the bank’s customer, when the
customer fails to fulfill any contractual or legal obligations towards the third person.
For example, A bank enters into an undertaking on behalf of X, who is the customer
of the bank, to pay Y, the seller/creditor from whom X has purchased goods. The bank
issues this bank guarantee document to the seller who can produce the same before the
bank and receive payment of the goods sold to X, where X has committed a breach of
contract.
28
Examples of bank guarantee:

– A bank guarantee may be given by a buyer to a seller as a guarantee for the future
payment.
– A bank guarantee may be given by the contractor as a guarantee for any amount
advanced.
Types of bank guarantees:
– Financial Guarantee.
– Performance Guarantee.
– Deferred Payment Guarantee.
– Statutory Guarantee.
The creditor in whose favor the guarantee is issued can be prevented from invoking
the same, by an injunction under the Civil Procedure Code, 1908, or the Specific
Relief Act, 1963. The creditor can be restrained from invoking the guarantee by the
debtor when he proves:
– Fraud committed by the creditor/beneficiary,
– Irreparable harm or injustice to himself.
13.5 Letter of Credit Contracts

Letters of credit are generally used in international transactions to ensure payment.
Due to the nature of international dealings that include factors such as distance,
differing legal systems of each country and difficulty in knowing each party
personally, the use of letters of credit has become a very important aspect of
international trade. The device used by the Bankers to effect payment is called the
‘Banker’s Commercial Credit’ or ‘Letter of Credit’.
A letter of credit is a document issued by a bank to a customer allowing him to draw
up to a predetermined amount of money, from the issuing bank, its branches, or other
associated banks or agencies on complying with specific requirements.
Where the Letter of Credit is used, in the sense that credit is given to the bearer of the
instrument, and the buyer defaults his payment or is unable to pay, the repayment of
such debt is confirmed by the (seller’s bank) issuing bank that it will make payment to
the seller/exporter/beneficiary. However, the bank will pay only when the seller/
beneficiary presents/submits the documents as mentioned in the Letter of Credit.
It is an assurance to the seller/beneficiary that he will receive payment on time and for
the correct amount for any goods which he sells to the buyer/customer.
 It is not a negotiable instrument and hence cannot be transferred or exchanged.
 A bank issues a Letter of Credit on the request of the buyer/customer and on the
basis of one’s financial position and reputation in the society.
 It is often abbreviated as ‘LOC’ or ‘L/C’, and is also referred to as a
‘documentary credit’.
 The seller need not worry about the import regulations of the buyer’s country nor
about the currency fluctuations.
 The buyer or the issuing bank need not pay money in advance to the seller.
29
13.5.1 Parties to a Letter of Credit

Applicant-Buyer-Importer-Opener: is a person who intends to purchase goods or
avail services for which payment is to be made and hence applies to a bank to open a
Letter of Credit.
Issuing Bank: The bank which opens a Letter of Credit on the request of the
applicant/ Buyer is referred to as an Issuing/operating/Importers Bank.
Beneficiary-Exporter-Seller: A person who has the right to receive payment or to
draw bills and receive payment as per the terms of the Letter of credit is known as the
Beneficiary/Exporter/Seller.
Advising Bank: It is a bank which forwards the Letter of Credit to the beneficiary. It
is located in the Beneficiary’s/Exporter’s country. It may also be termed as a
Notifying Bank.
Negotiating Bank: A bank in the beneficiary/Exporter country which makes payment
on the bills drawn by the seller and accepts the documents is called as a Negotiating
bank. The name of the Nominated/Paying Bank may be specified in the Letter of
Credit.
Confirming Bank: Where the advising bank in addition to advising credit to the
beneficiary confirms such credit, such an Advising Bank shall be deemed as a
Confirming Bank.
Reimbursing Bank: It is a bank appointed by the issuing bank to reimburse the
Negotiating, Paying or Confirming Bank.
13.5.2 Documents under a Letter of Credit

The issuing bank is bound to certify that the documents submitted by the
seller/beneficiary are as per the instructions of the applicant/buyer. The documents
that generally accompany a Letter of Credit are:
 Bill of Exchange
 Invoice
 Transport Documents
 Bill of lading
 Airway bill
 Post parcel receipts and courier receipts
 Insurance documents
 Other documents.
UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS –
UCPDC 500
The Uniform Customs and Practice for Documentary Credits are the conditions
according to which bankers issue or act on commercial credits. Being first formulated
in 1933 by the International Chamber of Commerce (ICC), they underwent several
revisions with the latest which came into force on January 1st 1994. They are called
the UCP 500. The UCP 500 are incorporated in the Letter of Credit as one of the
terms of Letter of Credit hence they are contractually binding on all the parties to the
Letter of Credit. They generally govern all Letter of Credit transactions.
30
a. Suresh a surety, in a contract of guarantee requiring three months notice,
revokes guarantee just a day before performance of contract. Is such a
revocation illegal?
b. A promises B to compensate the loss caused to B either by him or by another

person. What type of contract is this?
13.6 Contracts of Bailment

Bailment is the act of transferring goods to a person for a definite purpose, without
transferring its ownership. On accomplishment of purpose, the goods are required to
be returned in the accomplished form, to the person from whom the goods are
originally received or deliver the same as directed by him. There are three terms
involved in this transaction – bailor, bailee and contract of bailment.
 The person delivering the goods is ‘Bailor’.
 The person who took the delivery of goods is ‘Bailee’.
 The contract between the bailor and bailee is ‘Contract of Bailment’.
Contract of Bailment concludes when bailee delivers the accomplished goods either to
the bailor or to anyone as directed by him. Chapter IX of the Indian Contract Act,
1872 deals with the Contract of Bailment. (Section 148)
13.6.1 Requisites for Bailment Contract

 Bailor delivering the goods to the bailee
 The delivery must be for a definite purpose.
 The delivery done without transferring its ownership.
 On fulfillment of purpose, bailee needs to deliver the goods to bailor or to any
person as directed by him.
Illustration: In the case of Kavita Trehan and Others vs. Balsara Hygiene Products
Limited2, the court held that to constitute a bailment, change of possession is essential.
13.6.2 Duties/Liabilities of Bailor

Rights of Bailee
 It is the duty of the bailor to deliver the goods to the bailee in a manner that gives
an impact that the goods are placed in the possession of the intended bailee or any
person authorized to hold the same on his behalf. (Section 149).
2
AIR 1992 Delhi 92, 1991 RLR 544
31
 It is the duty of the bailor to disclose any material defects in the goods bailed to
the bailee. Such disclosure is important to the extent bailor is aware of such
default, interfere while working on such goods, unnecessarily expose the bailee to
extraordinary risk. In case of non-disclosure, bailor is held responsible for any
loss incurred by bailee owing directly to such non-disclosure. (Section 150)
Illustration: Siva hires Swaraz Mazda bus of Srinivas. The bus doors are loosely
fixed which Siva hides from Srinivas. Srinivas is injured. Owing to non-
disclosure, Siva is held responsible for the injury caused to Srinivas.
 It is the duty of the bailor to reimburse the necessary expenditure incurred by the
bailee for the work done on the bailed goods in terms of the contract of bailment.
This duty arises only when no remuneration is paid by bailor for the services
rendered by bailee. (Section 158)
In case the bailor fails to reimburse then the bailee possesses right of particular
lien on such goods till he receives such reimbursement. This is applicable when
there is no contract contrary to it.(Section 170)
Illustration: Gayatri delivers raw gold to Ritika for making a necklace. It is done
accordingly. Ritika got a special lien on such jewellery till she receives her
service amount from Gayatri.
Illustration: Srikarthi gives gold biscuit to Ritika for making a bracelet. It is
agreed that one month credit will be given for payment. The ornament made.
Ritika needs to deliver the ornament on completion and wait for a month to
receive the payment.
 It is the duty of the bailor to reimburse the loss, if any, incurred by the bailee on the
goods bailed to him gratuitously, if delivery is compelled prior to the predetermined
period or purpose. (Section 159). Gratuitous bailment gets automatically terminated
either on the death of the bailee or the bailor. (Section 162)
 It is the duty of the bailor to reimburse any loss or damage that may occur to
bailee, when the bailor fails to take the bailed goods within the specified period or
fails to honor the bailment or giving directions respecting the contract of
bailment. (Section 164)
 It is the duty of the bailor to bail the goods having title. Otherwise, the bailee
cannot be held responsible for any mishap happens in course of such delivery.
(Section 166)
13.6.3 Duties/Liabilities of Bailee

Rights of Bailor
 It is the duty of the bailee to take utmost care of the goods bailed, as a person of
ordinary prudence. (Section 151). Inspite of taking such utmost care, if there is
any loss, damage, destruction or deterioration incurred to the bailed goods, then
for such happening bailee shall not be held responsible. This holds goods only
when there exists no special contract between the bailor and bailee for the
same.(Section 152)
 It is the duty of bailee to use the bailed goods for the purpose it is bailed and not
for any other purpose. In case he makes any misuse then he is held liable for any
damage that incurs during or at the time of such misuse. (Section 154)
Illustration: Murali lends a laptop to Vasu, for his own use. Vasu allows Aditya,
his small brother, to use the laptop. Before giving, he spells all instructions for
good application of laptop. However, inspite of utmost care, laptop accidentally
falls on the ground and stops working. Vasu is held liable for the damage caused
to laptop irrespective of care taken by him and his brother.
32
 It is the duty of the bailee, not to mix the bailed goods with his other goods,
without the consent of the bailor. In case he does then he should bear the
repercussions of the same. That means,
 In case the bailee mixes the bailed goods with his other goods and unable to
separates them at the time of delivery then he is liable for the loss caused to
such goods to the bailor. (Section 157)
Illustration: Karthikeya bails a ton of sunflower oil to Rithvik. Rithvik,
without Karthikeya’s consent, combines the oil with refined oil. Sunflower
oil is costlier than refined oil. In this situation,
 Rithvik is bound to deliver the bailed oil to Karthikeya.
 He is bound to bear the expenditure incurred for such delivery.
 In case the bailee mixes the bailed goods with his other goods and able to
separate them for delivery then he is liable to bear expenses/costs, if any,
incurred for such separation. (Section 156)
Illustration: Aditya bails 300 bales of wool marked with a distinct mark to
Rama. Rama, without Aditya’s consent, mixes the same with his other bales
of wool possessing a different mark. In this situation,
 Rama is responsible for delivery of Aditya’s wool to him.
 Rama is held responsible for any expenditure incurred by him in the
course of separation and for any damage occurred to the bailed wool.
 It is the duty of the bailee to handover the predetermined share to the bailor, when
the bailee mixes the bailed goods with the consent of the bailor and for a
predetermined share. (Section 155)
 It is the duty of the bailee to return the bailed goods on expiry of bailed period or
on accomplishment of purpose for which such goods are bailed. (Section 160)
 It is the duty of the bailee to bear the consequences in all respects, when he fails
to deliver the bailed goods to the bailor in the manner predetermined by both the
parties. (Section 161)
 It is the duty of the bailee to handover profit or increase in value, if any, happens
on the bailed goods during the bailed period, to the bailor.(Section 163)
 It is the duty of the bailee to deliver the goods in the manner stated by the bailor.
Where the bailment consists of more than one bailor then the delivery shall be
made to them unless otherwise stated. (Section 165)
 It is the duty of the bailee to hold the bailed goods honoring the contract of
bailment. Or else, the bailor got every right to repudiate the contract. Thus,
contract of bailment is a voidable at the option of the bailor. (Section 153)
Illustration: A hires a tailor for stitching a blouse. Tailor stitches a frock. A got
every right to invalidate the contract and claim damages from the tailor.
13.6.4 Third Person’s Right in Bailment

When a dispute arises by a third party in respect of title of goods bailed by bailor, then
the third party can knock the doors of the court to
 Restrain the bailee from delivery of bailed goods to bailor, and
 Decide the title of the bailed goods. (Section 167)
33
13.6.5 Right of Finder of Goods

 The finder of goods cannot sue for compensation from the owner for the trouble
and expenditure incurred in protecting the goods and finding the owner. But he
can retain the goods till the owner pays him such compensation.
 The finder of the goods can sue for compensation when the owner declares the
same for the return of such goods. Here also, he can retain the same till he
receives the compensation. (Section 168)
 The finder to goods can sell such goods when
 The subject matter of such goods is bound to loose, or
 Unable to find the owner even searched with reasonable diligence, or
 The owner fails to pay the lawful charges incurred by him, even on demand.
The circumstances under which the finder is free to sell the goods are
 The goods tend to lose greater part of its value, or
 The lawful charges amounts to two-third value of goods subject.
(Section 169)
13.6.6 General Lien on Bailed Goods

General lien is the other side of the particular lien. Bankers, factor, wharfingers,
attorneys of a High Court and Policy brokers are qualified for retention of bailed
goods as a security for a general balance of account. This can be done unless contract
to the contrary is made.
Except those qualified above, for all others, an express contract must be available for
retention of bailed goods. (Section 171)
13.6.7 Suit Against Wrong-Doer

When a third person wrongfully deprives the bailee for using the bailed goods or does
any injury to them, then the bailee got all the options that are available to the bailor
for filing a suit against him and to claim compensation for such injury or deprivation.
He is entitled to act as if he is the actual owner of such bailed goods. (Section 180)
Such compensation shall be divided between bailor and bailee in proportionate to their
interest in such bailed goods. (Section 181)
13.7 Contracts of Pledge

The delivery of goods to a person as a security for repayment of a debt or for
performance of an act. The delivery is for temporary possession of goods until the
purpose gets fulfilled. The ownership in goods is not transferred. These are typically
used in securing loans, pawning property for cash and as a guarantee for
accomplishment of assigned work. Here,
 The person who delivered the goods is called as ‘Pledgor/Pawnor’,
 The person who receives the delivery of goods is called as ‘Pledgee/Pawnee’,
 The goods delivered are called as ‘Pledged Goods’,
 The contract between pawnor and pawnee is ‘Contract of Pledge’.
34
13.7.1 Bailment and Pledge

Prima facie, there exists a bailment in the pledge transaction.
 The bailment of goods delivered as security for repayment of a debt or for
performance of a promise is called ‘Pledge’.
 The bailor is termed as ‘Pawnor’.
 The bailee is termed as ‘Pawnee’.
 The contract of bailment is termed as ‘Contract of Bailment’.
 The bailed goods is termed as ‘Pledged Goods’. (Section 172)
13.7.2 Difference between Bailment and Pledge
Sl.
Subject Bailment Pledge
No.
1. Chapter IX of Section 148 to Section 171 Section 172 to Section
the Contract provisions of the Act. 181 provisions of the Act.
Act, 1872
2. Nature of It is the act of transferring It is the act of transferring
Transaction goods for a definite goods to create a security
purpose, without for repayment of debt or
transferring the ownership. for performance of a
Here, the purpose is either promise, without
crafting the goods or for transferring the
transportation. ownership.
3 Creation of It is termed as Contract of It is termed as Contract of
Contract Bailment. Pledge.
Parties to a Bailor – Person who Pawnor – Person who
Contract delivers the goods. delivers the goods.
Bailee – Person who takes Pawnee – Person who
the temporary possession of takes the temporary
goods. possession of goods.
4 Delivery of Goods delivered are ‘Bailed Goods delivered are
Goods Goods’. ‘Pledged Goods’.
5. Conclusion of Contract concludes when Contract concludes when
the Contract 1. Baliee accomplishes the 1. Pawnor repays the debt
assigned purpose and or performs the
2. Delivers the bailed goods promise made, and
to the bailor. 2. Pawnee handovers the
pledged goods to the
pawnor.
6. Usage of Goods Bailee can use the bailed Pawnee is not allowed to
goods, if the terms of use the pledged goods.
contract provide so.
7. Applicability Bailment is a ‘Genus’. Pledge is ‘Specie’. It is a
special kind of bailment.
35
Sl.
Subject Bailment Pledge
No.
8. Illustration Raj went to a five star hotel Raja went to a bank and
for the purpose of having delivered gold jewellery
dinner. When he entered the for a loan. The bank gave
room, the waiter took his the loan pledging the
coat and placed it on a hook jewellery with it.
behind it. Lending loan on pledging
Keeping and protecting the the jewellery, handing
coat till he finishes the over the jewellery on
dinner is bailment. repayment of loan
amount is pledge.
13.7.3 Duties/Liabilities of Pawnor

Rights of Pawnee
 It is the duty of the pawnor to perform the promise, repay the debt along with
interests if any and to reimburse all the necessary expenditure incurred by him
towards possession or for the preservation of the pledged goods (Section 172). In
case of any default, pawnee is entitled for retention of pledged goods till the
aforesaid duty is accomplished (Section173).
 It is the duty of the pawnor to reimburse any extraordinary expenditure incurred by
pawnee towards preservation of the goods pledged by the pawnor. (Section 175)
 It is the duty of the pawnor to repay the debt or perform the promise and to repay
any other expenses incurred in course of pledge to the pawnee within the stipulated
time. In case of default, the pawnee is left with two remedies: (Section 176)
1. He is entitled to file a suit against pawnor for such repayment or performance.
2. He is entitled to sell the pledged goods and recover his debt from the sale
proceeds of it. However, this can be done only after giving reasonable notice to
the pawnor. In case the proceeds are less than the pledged amount then he can
recover the balance amount from the pawnor. If the proceeds are surplus then the
amount in excess of pledged amount shall be paid to the pawnor.
Illustration: C availed loan from D. E and F pledged their shares worth 200% of
the loan amount as security. C became default in repaying the loan instalments. D
issued a recall notice wherein it clearly specified the default details and the time
period within which the defaulted amount shall be paid. Notice also clearly
indicated that in case the defaulted amount was not paid within the time stipulated
then the pledged shares shall be sold or transferred. Notice period was not
honored and D ultimately sold the pledged shares at different dates. C and others
questioned the reasonableness of the notice. According to them, process of sale
was uninformed thereby causing great loss to them. They alleged that D shall be
held liable for the shares misappropriated. On filing a suit, the court held that the
recall notice was reasonable enough to take suitable action by the alleged parties
and hence the action of C cannot be held unlawful. (M/s Indiabulls Housing
Finance vs. Green Gardens Private Limited (2013).
13.7.4 Duties/Liabilities of Pawnee

Rights of Pawnor
 It is the duty of the pawnee to retain only the pledged goods and not any other
goods of the pawnor. However, he can retain other goods also when a contract to
that extent is made. (Section 174)
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13.7.5 Mercantile Agent’s Pledge

 Owner pledges the goods with the Mercantile Agent for a loan. This being the
ordinary course of business of the mercantile agent, the pledge holds goods in the
eyes of law. However, this is subject to certain exceptions. Mercantile Agent
should have acted in good faith and with strong belief that the pawnor was
authorized for pledging such goods. (Section 178)
13.7.6 Pledged Goods under Voidable Contract

 Pawnor pledges the goods with pawnee under a contract of voidable nature.
 Pawnee accepts the goods not rescinding the contract.
 Pawnee acquires good title of goods only when he acts in good faith and
without notice of pawnor’s defect of title. (Section 178A)
In case the pawnor pledges the goods having limited interest with the pawnee. The
pawnee knows of this limited interest. In this situation the pledge holds good to the
extent of interest the pawnor is entitled to. (Section 179)
13.8 Contracts of Agency

Modern business is growing and becoming competitive day by day. To keep pace with
this development it is not possible for a businessman to carry on all his business
transactions on his own. This impossibility necessitates him to allow another person to
work on his behalf. This means he is delegating some of his powers to another person
to carry on some of his business transactions on his behalf. Here, the other person is
an agent and the person who delegated the powers is the principal. The contract which
binds the principal and agent is called an agency.
Illustration: X Co. engages the services of Y firm to sell its products. Here X is the
principal, Y is the agent and the contract between them is the contract of agency.
The provisions of Sections 183 to Section 238 of the Indian Contract Act, 1872
regulates the contract of agency.
Section 182 of the Indian Contract Act, 1872 defines agent and principal as:
“Agent” means a person employed to do any act for another or to represent another in
dealing with the third persons and the “Principal” means a person for whom such act
is done or who is so represented.
In a contract of agency, it is the agent who brings about a legal relationship between
two persons. It should be noted that an agent is not merely a connecting link between
the principal and a third person. The agent is also capable of binding the principal by
acts done within the scope of his authority.
An agent does not act on his own behalf but acts on behalf of his principal. He either
represents his principal in transactions with third parties or performs an act for the
principal. The question as to whether a particular person is an agent can be verified by
finding out if his acts bind the principal or not.
13.8.1 Creation of Agency

 Any person who is of the age of majority and is of sound mind may employ an
agent. [Section 183]
 Between the principal and the third persons, any person may become an agent.
But no person who is a minor and of unsound mind can become an agent.
[Section 184]
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 No consideration is necessary to create an agency. [Section 185]

 It is not essential that a contract of agency be entered into. It is sufficient if a
person acts on behalf of another and is accepted by the latter.
 An agency can be created either in writing or orally. An oral appointment is a
valid appointment even though the contract of agency by which the agent is
authorized has to be in writing.
Figure 1
Creation of
Agency
Express Agreement Implied Agreement
Express Agreement
An agency may be created either by express agreement, i.e., an agreement is said to be
express when it is given by words spoken or written. (Section 187)
Implied agreement
Implied agreement is, by inference from the circumstances of the case and things
spoken or written, or the ordinary course of dealing. (Section 187)
Illustration: X who, resides in Ahmedabad, owns a shop in Hyderabad. He visits his
shop occasionally. The shop is managed by Y who orders goods from Z in the name
of X for and pays the amount out of X’s funds with X’s knowledge. This means Y has
an implied authority from X to order goods from Z in the name of X.
Figure 2
Types of Implied Agency
Agency by Agency by Agency in Agency by Agency by

Estoppel Necessity Emergency Ratification Operation of Law
Implied Agency includes the following:

Agency by Estoppel or Holding Out: When a person, by his conduct or by
statement, leads willfully another person to believe that a certain person is his agent,
he is estopped from denying subsequently that such person is not his agent.
Agency by Necessity: Where there is no opportunity of communicating to the
concerned parties about any urgency and a person in such a situation acts as the agent
for the benefit of the other, agency by necessity is said to have arisen.
Agency in Emergency:
As per Section 189 of the Indian Contract Act, 1872, an agent has authority, in an
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.
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Illustration: ‘A’ consigns provision to ‘B’ at Kolkata, with directions to send them
immediately to ‘C’, at Cuttack. ‘B’ may sell the provisions at Kolkata, if they cannot
bear the journey to Cuttack without spoiling.
Agency by Ratification: Where acts are done by one person on behalf of another but
without his knowledge or authority, he may elect to ratify or to disown such acts. If he
ratifies them, the same effects will follow as if they had been performed by his
authority. The ratification may be express or implied.
Agency by Operation of Law: Promoters forming a company or partners of a firm
are considered to be agents of the principal company/firm by operation of law.
Types of Mercantile Agents
As per Section 2(9) of the Sale of Goods Act, 1930 explains Mercantile Agent as one
who has authority either to sell goods or to buy goods or to raise money on the
security of goods. They are of four kinds based on the nature of work they perform:
Factor: He is a mercantile agent to whom goods are entrusted for sale with wide
discretionary powers. He may sell such goods on his own name and may pledge the
goods as well on such terms as he thinks fit. Further, he has a general lien on the
goods of his principal for the general balance of account between him and the
principal.
Commission Agent: He is the mercantile agent who buys or sells goods for his
principal on terms as he thinks fits and receives commission for such work done. It is
immaterial whether he possess such goods or not.
Del credere Agent: The term del credere means ‘of entrusting’.
Del credere agent is a mercantile agent, who for additional consideration or extra
commission from his principal, undertakes to perform the financial obligations of such
third person in case such third person fails to fufill the same. Thus, he occupies the
position of surety as well as of an agent.
Broker: He is the mercantile agent who is employed to negotiate and make contracts
for the purchase and sale of goods. He has neither control nor possession of goods. In
case the deal materializes then he receives the commission called brokerage.
Auctioneer: He is an agent entrusted with the possession of goods for sale to the
highest bidder in public competition and authorized only to deliver the goods on
receipt of the price. Further he has implied authority to sign a contract or
memorandum of sale on behalf of the vendor and the purchaser.
A sub-agent is a person appointed by an agent to work for the business of agency. He
acts under the control and supervision of an agent. That means the agent acts as a
principal for the sub-agent (Section 191).
13.8.2 Rights and Duties of Parties

Duties of Agent
An agent is bound to conduct the business of his principal according to the directions
given, or in the absence of directions, according to the custom which prevails in doing
business of the same kind at the place where the agent conducts such business.
‘A’, was instructed to warehouse some drapery goods for P, at a particular place. He
warehoused a portion of them at another place where they were destroyed by fire
without any negligence on the part of ‘A’. Held, ‘A’ was liable to ‘P’ for the value of
the goods destroyed.
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If the agent adheres to the instructions given by the principal he cannot be made liable
if consequences turn out to be different from those contemplated by the principal.
An agent is under no obligation to follow instructions which are unlawful.
An agent is bound to render proper accounts to his principal and has duty, irrespective
of any contract to that effect, to produce vouchers by which items of disbursement are
supported as part of the obligation to render proper accounts to the principal on
demand. (Section 213)
His duty also consists in explaining them wherever necessary.
It is the duty of an agent, in cases of difficulty, to use all reasonable diligence in
communicating with his principal and seeking to obtain his instructions (Section 214).
In an emergency situation, the agent should exercise reasonable diligence and sound
discretion and adopt a course which appears best to him under the said circumstances.
He will be justified in this and shall have discharged his duties, though subsequent
events may demonstrate that some other course would have been a better option.
An agent is duty bound to pay sums received to the principal on his account.
However, the agent can deduct his lawful charges i.e., expenses properly incurred by
the agent and the remuneration if any.
The principal cannot recover money received by the agent on behalf of the principal in
cases where,
– The contract of agency itself is illegal.
– The agent has lawfully repaid the money to the third person from whom he
received it.
An agent should protect and preserve the interests of the principal in case of his death
or insolvency.
The agent must not make secret profit from the extract agency. He must disclose any
extra profit that he may make.
An agent must not allow his interest to conflict with his duty. For example, he must
not compete with his principal.
An agent must not delegate his authority to a sub-agent. This rule is based on the
principle Delegatus non-protest delegare – A delegate cannot further delegate
(Section 190). The exception to this rule is when delegation is allowed by the
principal or the trade custom or usage sanctions delegation or when delegation is
essential for proper performance or where emergency renders it imperative or where
nature of the work is purely ministerial and where the principal knows that the agent
intends to delegate.
Rights of Agent
The agent has a right to retain any sums received on account of the principal in the
business of the agency, all money due to himself in respect of his remuneration and
advances made or expenses properly incurred by him in conducting such business.
The agent has a right to receive remuneration.
Right of Lien: In the absence of any contract to the contrary, an agent is entitled to
retain goods, papers and other property, whether movable or immovable, of the
principal received by him until the amounts due to himself from commission,
disbursements, and services in respect of the same has been paid or accounted for to
him.
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The lien exercised by an agent can be either a particular lien or a general lien.
The right of lien is lost if:
– The agent parts with the goods voluntarily;
– He waives or abandons his lien or takes another security;
– The principal repays the amount due; or
– The agent enters into an agreement which is inconsistent with the lien.
The employer of an agent is bound to indemnify him against the consequences of all
lawful acts done by such agent in exercise of the authority conferred upon him. The
following cases discuss this in detail:
i. The agent has a right to receive compensation for injuries sustained due to neglect
or want of skill on part of the principal.
ii. Right of stoppage of goods in transit: This right is available to the agent in the
following two cases:
– Where he has bought goods for his principal by incurring a personal liability,
he has a right of stoppage in transit against the principal, in respect of the
money which he has paid or is liable to pay;
– Where he is personally liable to the principal for the price of the goods sold,
he stands in the position of an unpaid seller towards the buyer and can stop
the goods in transit on the insolvency of the buyer.
RIGHTS OF PRINCIPAL
Right to Repudiate the Transaction
An agent in a fiduciary position, is duty bound to transact the agency work in the
interest of his principal business and not otherwise. That means he is not entitled to do
anything for his personal benefit out of his principal business.
The principal may repudiate such agent’s transaction if he can prove that:
 A material fact has been dishonestly concealed from him; or
 The dealing of the agent has been disadvantageous to him.
Illustration: X appoints Y to sell her estate at Ahmedabad. Subsequently, Y
discovered a mine in her principal’s estate. Without disclosing this fact to her she buys
the estate for herself. The principal may repudiate the transaction.
To Claim any Resulted Benefit from Agency
If an agent, without the knowledge of his principal, deals in the business of the agency
on his own account instead of on account of his principal, the principal is entitled to
claim from the agent any benefit which may have resulted to him from the transaction.
(Section 216)
Thus, the principal has every right to obtain an account of secret profits and recover
them and resist a claim for remuneration.
Right to Recover Damages
If the principal suffers any loss due to disregard by the agent of the directions by the
principal, or by not following the custom of trade in the absence of directions by the
principal, or where the principal suffers due to lack of requisite skill, care, or diligence
on the part of the agent, he can recover damages accruing as a result from the agent.
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To Resist Agent’s Claim for Indemnity

Where the principal can show that the agent has acted on his own behalf and not on
the behalf of the principal, he can resist the agent’s claim for indemnity against
liability incurred.
Duties of Principal
To indemnify against consequences of all lawful acts of agent: The principal is
bound to indemnify the agent against the consequences of all lawful acts done by such
agent in exercise of the authority conferred upon him. (Section 222)
Illustration: X employs Y to enter into contract with Z for purchase of 100 rice bags
for her. Subsequent to the contract entered with Z by Y, X refuses to take the delivery
of such rice bags from him. Z sues Y against such refusal. Y is made liable to pay.
Z and X is made liable to pay Y towards damages, costs and expenses incurred on
such refusal.
To indemnify the agent against consequences of acts done in good faith: The
principal is required to indemnify the agent against the consequences of acts done in
good faith. According to Section 223 of the Contract Act, where one person employs
another to do an act and the agent does the act in good faith, the employer is liable to
indemnify the agent against the consequences of that act though it causes an injury to
the rights of third persons.
To pay compensation against agent’s injury: The principal must make
compensation to his agent in respect of injury caused to such agent by the principal’s
neglect or want of skill. (Section 225)
To pay the agent the commission or other remuneration agreed.
13.8.3 Termination of Agency

According to Section 201, an agency is terminated by:
 By an agreement between the parties, or
 By the principal revoking his authority; or
 By the agent renouncing the business of agency; or
 By the business of agency being completed; or
 By either the principal or the agent dying or becoming of unsound mind; or
 By the principal being adjudicated an insolvent under the provisions of any act
for the time being in force for relief of insolvent debtors.
Thus an agency may be terminated by Agreement, Revocation of authority by the
Principal and by operation of Law.
EXCEPTIONS
Irrevocable Agency
When an agency cannot be put an end to, it is said to be irrevocable agency. An
agency is irrevocable where the agent himself has an interest in the property which
forms the subject-matter of the agency. Such an agency cannot, in the absence of an
express contract, be terminated to the prejudice of such interest.
Illustration: ‘A’ gives authority to ‘B’, to sell ‘A’s land and to pay himself, out of the
proceeds, the debts due to him from ‘A’. ‘A’ cannot revoke this authority, nor can it
be terminated by his insanity or death.
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When agent has incurred a personal liability the agency becomes irrevocable.
The principal cannot revoke the authority given to his agent after the authority has
been partly exercised, as far as such acts and obligations arise from acts already done
in the agency. (Section 204)
Time when Termination takes Effect
The termination of the authority of an agent does not, take effect before it becomes
known to him. As regards third persons, it terminates when it comes to their notice.
a. Amit, a duly appointed agent of Bharat, insures the goods of Bharat without
his authority. Later on, Bharat satisfied with the act of Amit , pays the
premium. Examine the type of agency created.
b. Mr. Mukarjee employs Pravin as his agent in selling his used car. Pravin is
instructed to sell the car for a price not less than Rs.50,000. Pravin buys the
car himself and hands over Rs.50,000 to Mukarjee, who is quite satisfied
with the price and does not ask for the name of the buyer. A few days later
Pravin sold the car for Rs.1,00,000 to After knowing the fact Mukarjee wants
to recover the excess profit of Rs.50,000 from Pravin. Can Mukerjee succeed
in recovering the excess profit?
13.9 Employment Contracts

Employer-employee relationship has acquired a new meaning and significance with
the phenomenal rise of globalization, market economy and free trade. Employers can
no longer dictate terms to employees. Employees have become the equal partners and
players in the economic sector. In fact, the positive role being played by both the
employer and the employee in all sectors of activity public and private, is immensely
contributing towards achieving peace, prosperity and happiness of the humankind.
Efficient corporate governance is recognized as the key to progress.
13.9.1 The Employer-Employee Relationship

 The employer-employee relationship is primarily determined by the terms of the
employment contract, which can be either oral or written.
 The contract should specify a job description, wages, employee rights and duties
and other specific terms and conditions of employment.
 A contract for employment is generally presumed to be “at will” unless otherwise
specified.
 An employer or employee can terminate an “at will” employment relationship at
any time and for any reason, unless the law provides a specific exception to this
general rule.
 The employer-employee relationship is contractual and gives rise to reciprocal
obligations of rights and duties:
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Duties of Employee: There are two types of duties of employees –

Those that arise from tort law or agency law; and
Those that arise from contract law.
CONDITIONS IN CONTRACTS
Employment at Will
The doctrine of “employment at will” gives free hand to both as the employee can
quit, and the employer can fire an employee at his will, at any time and for any reason
and without any prior notice.
Express Contract
An express contract can be either in writing or in oral. An employer might want to
have in an express contract a statement that:
The employee can be fired or otherwise disciplined only for “just cause” or
“reasonable cause” or some such general language.
Further, an employer might include in an express contract the following conditions:
– An agreement not to compete (non-competition agreement).
– An agreement not to use the employer’s trade secrets, customer lists, and so on.
– An agreement to arbitrate disputes rather than taking them to court.
Termination
Before the employee is discharged or action for discipline is taken, he has to be given
an opportunity to explain or have some kind of hearing.
Liquidated Damages
An agreement for liquidated damages can only be when there is an engagement for the
performance of certain acts that if not done would injure one of the parties or to guard
against the performance of acts that would be injurious if done.
Generally the sum fixed upon will be considered either liquidated damages or a
penalty or forfeiture according to the intent of the parties.
Data Privacy
Data privacy refers to the evolving relationship between technology and the legal right
to, or public expectation of privacy in the collection and sharing of data. Privacy
problems exist wherever uniquely identifiable data relating to a person or persons are
collected and stored, in digital form or otherwise. Improper or non-existent disclosure
control can be the root cause for privacy issues.
Confidentiality Agreements
Two restrictions are non-use and non-disclosure and an agreement should have both.
An example of confidentiality breach might be disclosing the identity of the former
employer’s customers to the new employer. There are three levels of confidentiality.
The lowest level is public domain information, followed by confidential information,
and finally by trade secrets, the highest of the three.
The law of employment establishes minimum statutory requirement for compensation
for individual terminations:
 For periods of employment greater than 3 months, the employer must pay
severance to the employee, or satisfy that obligation by giving a written notice of
termination.
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 Group terminations (those of 50 or more) have additional requirement under the law.
First, the employer must give written notice to the minister , to the employee being
terminated and to the Union. This notice must specify the number of employees being
terminated and dates of terminations and the reason for termination.
INDEMNIFICATION
Indemnity is a legal exemption from the penalties or liabilities incurred by any course
of action.
Corporate officers, board members and public officials often require an indemnity
clause in their contracts before they perform any work. In addition, indemnification
provisions are common in intellectual property licenses in which the licensor does not
want to be liable for misdeeds of the licensee. Such a license would protect the
licensor against product liability and patent infringement.
13.9.2 Checklist of Standard Clauses

Commencement of employment,
 Job title,
 Salary,
 Place of posting,
 Hours of work,
 Leave/Holidays,
 Nature of duties,
 Company property,
 Borrowings/accepting gifts,
 Termination,
 Confidential information,
 Notices,
 Applicability of company policy,
 Governing Law/Jurisdiction,
 Acceptance of offer.
a. Seenu is an office boy in a corporate office. At the time of appointment there
was an agreement between him and the employer that Seenu can be
terminated at any time without mentioning any cause. In the light of the
given situation, can Seenu be fired at any time?
b. Safin owes certain amount to Robin. Mary promises Safin to save him from
indebtedness. Robin wants Safin to repay the debt with interest. On the failure
of Safin to repay, Robin filed a suit against Safin. What kind of contract has
Mary and Safin entered into?
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13.10 Special Rights in Contracts

Lien
Lien is the right of a person (usually the creditor) to retain the possession of the goods
and securities belonging to another person (the debtor) till the amounts due to him
from such owner are fully realized. The lien can be defined as “the right to retain the
lawful possession of the property of another until the owner fulfills a legal duty to the
person holding the property, such as the payment of lawful charges for work done on
the property. A mortgage is a common lien.”
Illustration: The transporter of goods retains the possession of the goods that he has
carried to the destination till the amount of freight is paid to him.
The right of exercising Lien may arise in three ways:
 By express contract in between the parties;
 From implied contract in accordance with the general or particular usage of trade;
and
 By legal relation between the parties.
In order to create a valid lien, the following factors are essential:
 The party who acquired the property should have the absolute title of ownership
over that property;
 That the party claiming the lien should have an actual or constructive possession
of property or goods with the assent of the party against whom the claim is made;
and
 The lien should arise upon an agreement, express or implied and not be for a
limited or specific purpose inconsistent with the express terms or the clear, intent
of the contract; e.g., when goods are deposited to be delivered to a third person or
to be transported to another place.
There are two kinds of lien; particular lien, and general lien.
Particular Lien
A person claims the right to retain property in respect of money or labor expended on
such particular property. This right is known as particular lien. In Indian law,
particular lien is available to all the classes of people other than those mentioned in
Section 171 of the Indian Contract Act, 1872.
The creditor with a particular lien can retain the possession of the goods only till the
dues from the debtor for a particular debt for which the securities were handed over
have been satisfied.
Example: A, the goldsmith is given the gold by B, the owner to convert it in the form
of golden ornaments. He can retain the possession of the ornaments only till the
service charges for making those ornaments are paid by the owner, but not for any
other liability to be discharged by the owner of the golden ornaments.
General Lien
“A general lien is one which the holder thereof is entitled to enforce as a security for
the performance of all the obligations, or all of a particular class of obligations, which
exist in his favor against the owner of the property.”
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A general lien is a lien in respect of all monies owed to the licensee. A particular lien
is limited to monies owed to the licensee in respect of the goods over which the lien is
sought to be exercised.
Illustration: ‘X’ has borrowed from the bank in the form of two types of loans, one is
the agricultural loan for cultivation of crop and the other is a personal loan against the
security of his gold ornaments to meet his personal expenditure The agricultural loan
has become due for repayment. If there is no specific agreement in between the bank
and the borrower in consistent with the lien, when the personal loans is repaid, the
bank can exercise the right of general lien by retaining the possession of golden
ornaments after the borrower repays the entire liability in his personal loan till the
dues accrued in the agricultural loan are repaid. But, the bank cannot exercise the right
of lien when the agricultural loan is not due for repayment at the time when the
personal loan is closed.
Banker’s Lien
 Section 171 of the Indian Contract Act, 1872 authorizes bankers, in the absence
of a contract to the contrary, to retain, as a security any goods bailed to them.
However, this does not entitle third persons to retain goods as security bailed to
them unless they have entered into an express contract to that effect.
 It is a right of the banker to retain in custody the securities or properties in order
to get the debts discharged.
 No agreement or contract is required for its creation.
 It can be exercised over securities or properties (all bills, cheques, and money
paid or entrusted) which he has received as a banker.
Set-off – Banker’s Right
The banker’s right of set-off is also known as the right to combine accounts. A banker
is authorized to set-off a debt which he owes to a customer against a debt which the
customer has to pay the bank. For example, a customer has two accounts. He borrows
a sum of money from the bank and the bank also owes him some amount. In such a
case the bank can set-off its due towards the customer by combining the funds of one
of his accounts into the other. It is a type of a security, a remedy, a right for the
banker. It is an attractive security because its realization does not involve the sale of
an asset to a third party.
13.11 Drafting of Contracts
13.11.1 Important Clauses in Contracts

Agreements representing the various conditions agreed to by the parties and
mentioned in the form of certain ‘clauses’ form the foundation of rights and liabilities
of the parties. The significance of these clauses is explained below:
Description of Parties
Any format of an agreement opens with the usual heading of description of the deed
clearly describing the name of the transaction which they evidence, such as, “THIS
DEED OF SALE” or “THIS DEED OF LEASE” etc. The description is followed by
the date on which the said DEED is executed. After these two, the names and
description of the parties to the deed are mentioned.
The Parties: The description of the parties to an agreement names the individuals and
the full details thereof.
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Party – A Juridical Person: One of the parties or both the parties happen to be
juridical person(s), such as, a company, or an association or body of individuals
(Section 5 of the Transfer of Property Act, 1882), or an idol or a corporation sole or
aggregate, or, in fact, any juridical person capable of holding property and entering
into contracts. A court is not a juridical person capable of holding property or entering
into contracts, and security bonds, which are given to courts, must, therefore, be made
in favor of a named officer of the court and not in favor of the court. Care should be
taken that companies, associations and corporations are described by their correct
names. It is better also to refer to the act under which they are registered or
incorporated thus:
“… … (name), a company within the meaning of the Companies Act, 1956, and
having its registered office at … …”
Party – An Idol: In the case of an idol, as it has to act through some natural person,
the name of the latter should be disclosed, thus:
“the idol of ……(name) installed in the temple at ……(place), acting through
its……(name), son of ……………………..(name) of …………………”
Persons under Disability: As persons under disability namely, minors, persons of
unsound mind and persons disqualified from contracting by any law to which they are
subject, cannot enter into a contract. In such cases, the representatives on their behalf
could enter into agreements, as per the law in that regard.
Recitals of Subject
A recital means the account of the subject-matter of a deed of agreement. Recitals are
of two types:
 Narrative recitals, which relate the background history of the subject-matter and
set out facts and other related particulars to show the relation of the parties to the
subject-matter of the deed; and
 Introductory recitals, which explain the motive for the preparation and execution
of the deed.
Precautions: Recitals should be inserted with abundant caution because they may
control the operative part of the deed if the same is ambiguous, and may operate as
estoppel by preventing the parties and their representatives from showing the
existence of a different state of things from that stated in the recitals. Hence, persons
drafting should, therefore, exercise utmost care and caution to avoid unnecessary
recitals and to ensure that all recitals are both correct and judicious.
Order of Recitals: In case there are numerous and lengthy recitals, they should be
mentioned in a chronological order. Facts and events contained in the introductory
recitals also should be inserted in the sequence in which they have occurred.
Form of Recitals: Generally, recitals begin with the word ‘Whereas’, but where there
are several recitals, one can either repeat the word before every one of them by
beginning the second and subsequent ones with the words “And Whereas”, or divide
the recitals into numbered paragraphs with the word “Whereas” at the top.
Consideration
As agreements are necessarily for some consideration (Section 10 of the Indian
Contract Act, 1872), it is mandatory to express the consideration, except where it is
not required by the Act. (for example, in the case of a gift).
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Covenants and Undertaking

In some cases, where the parties to the agreement enter into covenants, it is necessary
that such covenants should be entered as such. While drafting covenants, regard
should be had to the statutorily implied covenants, which operate subject to any
contract to the contrary. For instance, Section 55 (Sale), Sections 65 and 67
(Mortgage), Section 108 (Lease) of the Transfer of Property Act should be kept in
mind.
Where several covenants follow each other, they may run on as one sentence, each
being introduced with the words “and also” or by the words “First”, “Secondly”, etc.
or they may be sent out in paragraph form with the heading:
“The vendor hereby covenants with the purchase as follows”: … …”
It is desirable to place the covenants of the respective parties separately, including
those covenants entered into mutually. Care should be taken to see that they are not
mentioned wrongly under those of the other party.
Sometimes, where the terms and conditions of a transfer cannot be conveniently
separated into the respective parties, it would be better to include all the covenants
under one heading as those of the parties thus: “The parties aforesaid hereto hereby
mutually agree with each other as follows:”
Signatures and Attestation
After all the important clauses of a deed of agreement have been duly incorporated in
the order of their precedence, the important part of the deed that concludes it is the
“testimonium”, which sets forth the fact of the parties having signed the deed.
Usually, it concludes thus:
“In witness whereof, the parties hereto have signed this deed on the date first above
written.”
This is followed by the signatures of the parties, being the executants of the deed and
those of the attesting witnesses, who testify as to the fact of such execution by the
former.
Where the executants is not competent to contract or is a juristic person, the deed must
be signed by the person competent to contract on his or its behalf.
Affixing Signature: The word ‘sign’ means “to write one’s name on, as in
acknowledging authorship.” Section 3(56) of the General Clauses Act, 1897, extends
its meaning, with reference to a person who is unable to write his name, to include
‘mark’. The document must be signed by a person in such a way as to acknowledge
that he is the party contracting and it is not very material in what part of the document
the signature appears.
Attestation: Attestation should be by at least two witnesses, who should have seen
the executant sign the deed or should have received from the executant personal
acknowledgement of his signature but it is not necessary that both the witnesses
should have been present at the same time (see definition of ‘attested’ in Section 3 of
the Transfer of Property Act and also in Section 63 of the Indian Succession Act).
There are no particular forms of attestation but it should appear clearly that a witness
intended to sign as an attesting witness.
Illiterate person not able to sign may either put his pen mark or thumb mark. The
modern practice allows the thumb mark only as the recognized form of signing a deed.
For instance, a thumb mark is more satisfactory for identification purposes.
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Endorsement and Supplemental Deeds

Where a deed or agreement becomes necessary in pursuance of, or in relation to a
prior deed, it is effected either by endorsement on the prior deed when a short writing
would be sufficient, or by a separate deed described as “supplemental” or “intended to
be read as annexed to the prior deed”, in which case, detailed recitals of the prior deed
are unnecessary.
Stamp Duty
The law on affixing stamps to various documents is governed by the Indian Stamp
Act, 1899 as amended in its application to various states by local amendment Acts.
The Stamp Act extends to the whole of India except the state of Jammu and Kashmir.
The main purpose of the Stamp Act is to raise revenue by means of stamp duty on
certain documents.
Requirements of Valid Stamping
Time of Stamping: Stamp duty is leviable on the instrument at the time of execution
of the instrument, unless the document comes within the charging section it is not
liable to duty.
Types of stamps used for documents
Revenue Stamps: Documents like demand promissory notes, cash receipts,
acknowledgement of debt should be stamped with adhesive revenue stamps of
appropriate value before execution.
Special Adhesive Stamps: Printed agreements/xerox copies of printed blank
documents should be affixed with special adhesive stamps. These stamps are
cancelled by appropriate authority before execution of documents.
Other Documents: Share transfers, notarial acts, bills of exchange made out of India.
– Embossed/Engraved Stamps: Stamps can also be embossed or engraved by the
stamp authorities on banks’ standard forms.
– Non-judicial Stamp Paper: Non-judicial stamp paper carries the stamp duty
embossed on the paper itself and as such stamped paper of requisite value may be
purchased from local stamp vendors.
Only one instrument is made on a stamp paper (Section 14).
Section 29 of the Stamp Act provides which party, in the absence of and agreement to
the contrary, will bear the stamp duty payable on an instrument. This may be kept in
view while drafting a deed.
Stamp Duty on Endorsements and Supplemental Deeds
 All endorsements or supplemental deeds should be stamped according to the
nature of the transaction, which they evidence, e.g., if it is for receipt of money, it
should be stamped as a receipt; if it is an agreement, it should be stamped as an
agreement.
 Some documents if endorsed on prior deeds are exempt from stamp duty, e.g.,
receipt of mortgage money endorsed on mortgage deed, or transfer of a bill of
exchange or policy of insurance or securities of Government of India endorsed on
those papers.
Registration
The preliminary note to each deed shows whether a deed is required to be
compulsorily registered (Section 17, Registration Act):
Some documents though do not require registration may be voluntarily got registered
(Section 18).
50
Section 49 provides that an unregistered document of the nature requiring compulsory

registration may be used in evidence for certain collateral purposes, though not as
evidence of the transaction itself.
Section 60(2) provides that the Sub-Registrar’s endorsement while registering a
document is admissible in evidence for proving the facts mentioned therein.
AppliCable Law
 The interpretation of a written contract involves the ascertainment of the words
employed by the parties and the determination, subject to any rule of law, of the
legal effect of those words.
 The object sought to be achieved in construing any contract is to ascertain what
the mutual intentions of the parties were as to the legal obligations, each assumed
by the contractual words in which they sought to express them.
 There is no intention independent of the meaning of the words they have used.
The proper construction of contract is a question of law.
 However, the ascertainment of the meaning of a particular word is a question of
fact. The general presumption is against implying terms into written contracts.
The more detracted and apparently completed the contract, the stronger the
presumption.
 The contract must be construed as a whole and no clause should be taken in
isolation.
 The court will not for the purpose of construction correct a mistake as to the legal
effect of a written contract. However, such a mistake can be corrected by
rectification.
 The materials available to the courts for the purpose of construing a contract are
documents to be construed, consideration of deleted words to construe the words
that remain, antecedent agreements, drafts and preparatory negotiations along
with expressly incorporated terms.
Lex Fori
It means the “law of the forum.” It signifies that the proper law applicable in
enforcing contracts is deemed to be the law of the country according to whose laws
the contracting parties wish to be governed. If such intention does not exist the
applicable law is objectively determined as the law of the country with which the
contract is primarily concerned.
Force Majeure
It is a common clause in contracts, which decides the rights and liabilities of the
contracting parties and relieves them of their duties accordingly on the happening of
certain events during the course of executing the terms of a contract.
Force majeure (French for “greater force”) is a common clause in contracts, which
essentially frees one or both parties from liability or obligation when an extraordinary
event beyond the control of the parties, such as war, strike, riot, crime, and act of God
(e.g., flood, earthquake, volcano) prevails on one or both parties from fulfilling their
obligations under the contract.
Notice
It may be described as an official communication of a legal action or one’s intent to
take an action. In a contract, notice has some legal implications. The parties to the
agreement, by mutual consent, agree to incorporate the clause of ‘Notice’, whereby,
either party could issue a notice to the other party, in case of breach or as to any
change in the subject-matter of the contract.
51
For example, a notice to quit is a written notification given either by the tenant to the
landlord, or vice-versa, indicating that either the tenant intends to surrender possession
of the premises on a certain day or that the landlord intends to regain possession of the
premises on a certain day. Many kinds of contracts require that similar notice be given
to either renew or end the contractual relationship.
Arbitration Clause
The advantages for including arbitration clauses in commercial agreements are that it
is prompt and therefore, inexpensive, way of resolving business disputes and suitable
for present day commercial transactions.
Arbitration agreement
When parties to a contract, agree to incorporate the arbitration clause as a machinery
to redress the grievances, if any, which may arise while fulfilling the contractual
obligations, such an agreement is called an arbitration agreement.
a. A gives a water heater for repair to an electric appliances shop. He says that
he will take the water heater only when it is completely repaired. The electric
appliances shopkeeper repairs the water heater and refuses to hand over the
water heater until he is paid for his services. Can the shopkeeper retain the
heater? If yes, under what right can he do so?
b. The concluding part in the deed of agreement,

“In witness whereof, the parties hereto have signed this deed on the data first
above written” followed by signatures of parties, is referred to as _________.
13.11.2 Checklist for Standard Clauses

 Preamble
 Parties
 Definitions
 Offer, Acceptance ,
 Obligations
 Conditions
 Indemnification and Exoneration
 Environmental Responsibilities
 Security
 Delivery
 Insurance
 Risk of Loss
52
 Price and Currency Indexes

 Force Majeure and Hardship Clause
 Default
 Termination and Expiration
 Assignment
 Options
 Intellectual Property Rights
 Confidentiality and Non-compete
 Penalties and Liquidated Damages
 Delay
 Non-waiver Clause
 Notice Clause
 Publicity Clause
 Language Clause
 Required Activity
 Choice of Law and Venue.
13.12 Summary
Agency may be created either by implied or express agreement. An agreement is said
to be express when it is given by words spoken or written. Implied agreement is by
inference from the circumstances of the case and things spoken or written, or the
ordinary course of dealing.
Commercial agreements represent the conditions agreed by the parties and contain
certain clauses which form the basis of the rights and liabilities of the parties. The
clauses in corporate and commercial agreements include the description of the parties,
the subject matter of the agreement, the consideration paid by the promisor, statutorily
implied covenants, the signatures of the parties to the agreement, attestation by
witnesses and if required, endorsements to the agreements or supplemental deeds.
The employment contract between an employer and employee can be either oral or
written specifying the job description, wages, employee rights and duties and other
specific terms and conditions of employment.
13.13 Glossary
 Agency is a contract of a business or service authorized to act for others.
 Del Credere Agent is an agent that guarantees his or her principal that the third
parties involved in the transaction will pay or perform.
 Estoppel is an impediment that prevents a person from asserting or doing
something contrary to his own previous assertion or act.
 Guarantee by which one person assumes responsibility for paying another’s
debts or fulfilling another’s responsibilities.
 Indemnity is a security against loss or damage or injury. It is a contractual
agreement made between different parties to compensate for any damages or
losses.
53
 Lien is an encumbrance or legal burden upon property.

 Pledge is something given or held as security to guarantee the payment of a debt
or fulfillment of an obligation.
 Principal is a person who empowers another to act as his or her representative.
 Ratification means making something valid by formally ratifying or confirming it.
 Surety is a security for payment or performance on behalf of another in the event
of a default.

1. Dr. Avtar Singh. Law of Contract and Specific Relief. 11th Edition (2013) Eastern
Book Company.
2. Beatson J. Anson’s Law of Contract. 29th Edition (2010) Oxford University
Press.

a. Agency by ratification: Where acts are done by any person on behalf of another
but without his knowledge or authority, he may elect to ratify or disown such
acts. If he ratifies them, the same effects will follow as if they had been
performed by his authority. The ratification may be express or implied, this is
known as agency by ratification. In the given case also Bharat can ratify the act of
insuring his goods by Amit.
b. As per the provisions of law of agency, the agent must not make secret profit
from the Instrument of agency. He must disclose any extra profit that he makes.
In the given case also Pravin (agent) is not allowed to make any secret profit.
Mukarjee (principal) can recover the excess profit made by Pravin.
a. If a contract of guarantee requires three month’s notice the surety must give a
three month’s notice.
b. A contract by which one party promises to save the other from loss caused to him
by the conduct of the promisor himself, or by the conduct of any other person, is
called a contract of indemnity.
a. Seenu is an office boy in a corporate office. At the time of appointment there was
an agreement between them that Seenu can be fired at any time without
mentioning any cause. Therefore Seenu can be terminated without showing any
cause. This kind of agreement is called, as employment at will.
Employment at Will
The doctrine of “employment at will” gives free hand to both as the employee can
quit, or the employer can fire an employee at his will, at any time and for any
reason and without any prior notice.
b. The contract between Mary and Safin is called contract of indemnity, which is
defined under section 124 of the Indian Contract Act, 1872.
According to Section 124 of the Indian Contract Act, 1872 a contract by which
one party promises to save the other from loss caused to him by the conduct of
the promisor himself or by the conduct of any other person, is called a ‘contract
of indemnity’.
54
a. ‘A’ gives a water heater for repair to an electric appliances shop and says that he
will take back the water heater only when it is completely repaired. The electric
appliances shopkeeper repairs the water heater and refuses to hand over the water
heater until he is paid for the same. This right of shopkeeper is called lien.
b. The concluding part of the deed is referred to as ‘testimonium’.

A. Multiple Choice
1. Which of the following agents are treated as non-mercantile agents?
a. Factors.
b. Auctioneers.
c. Brokers.
d. Del-Credere agents.
e. Insurance agents.
2. In which of the following cases an agency is terminated other than by operation
of Law?
a. On performance of the contract.
b. By mutual agreement.
c. On the insolvency of principal.
d. On the destruction of subject matter.
e. On termination of sub-agents authority.
3. Among the following parties, who enjoys the right of subrogation in a contract of
indemnity?
a. Creditor.
b. Principal debtor.
c. Indemnifier.
d. Indemnified.
e. Both (a) and (b) of the above.
4. General Insurance is a
a. Voidable Contract
b. Wager
c. Contract of Guarantee
d. Contract of Indemnity
e. None of the above.
5. A continuing guarantee can be revoked by
a. Novation
b. Death of surety
c. Discharge of principal debtor
d. Loss of security
55
B. Descriptive
1. What is a bank guarantee ? Distinguish a bank guarantee from an ordinary
guarantee
2. What are the features of a letter of credit? How do the parties to a letter of credit
use these letters of credit during the conduct of business?
3. What is the meaning of the word ‘lien’? What are the different kinds of lien?
These questions will help you to understand the unit better. These are for your
practice only.
56
Course Components
BLOCK I The Socio-Political Environment of Business

Unit 1 Business Environment: An Introduction
Unit 2 Demographic and Social Environment
Unit 3 Cultural Environment
Unit 4 Political Environment
BLOCK II The Economic and Technological Environment of Business
Unit 5 Economic Environment
Unit 6 Financial Environment
Unit 7 Trade Environment
Unit 8 Technological Environment
BLOCK III The Legal and Ethical Environment of Business
Unit 9 Legal and Regulatory Environment
Unit 10 Tax Environment
Unit 11 Ethical Environment
BLOCK IV Business Contracts
Unit 12 Law of Contracts
Unit 13 Special Contracts
BLOCK V Law Relating to Corporate Business Entities
Unit 14 Formation and Organization of Companies
Unit 15 Company Management and Winding Up
BLOCK VI Tax Laws
Unit 16 Direct Taxes
Unit 17 Indirect Taxes

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Business Environment and Law

Ref. No. BELIFHE – 052015 B4

Our E-mail id: cwfeedback@icfaiuniversity.in

Unit 13 deals with concepts of special contracts such as contract of agency,

It also deals with special rights available to parties in a contract. A brief

12.3 Meaning of a Contract

12.4 Essential Elements of a Valid Contract

12.4.1 Offer and Acceptance

Source: Smith & Keenan’s. Advanced Business Laws.

Revocation Lapse of time Counter-offers Effect of death

General Unilateral contracts

Lapse or Termination of an Offer

12.4.3 Legality of Consideration and Object

12.4.4 Intention to Create Legal Relationship

12.4.5 Capacity to Contract

12.4.6 Free Consent of the Parties

12.4.7 Conclusion of Contract

12.4.8 Legal Formalities

12.5 Certainty and Possibility of Performance

Performance When “Time is the Essence of the Contract”

b. Shyam advertises in a newspaper that he would pay Rs.5,000 to anyone, who

12.6 Classification of Contracts/Agreements

Standard Form Contracts: Standard form contracts have printed forms of

12.7 Void Agreements

subsequent impossibility or when a voidable contract is made void by the aggrieved

Agreements by incompetent parties (Section 11)

Agreements with unlawful consideration or object (Section 23):

– immoral and illegal agreements

Agreements unlawful in part (Section 24)

Agreements without consideration (Section 25)

Agreements in restraint of marriage (Section 26)

Agreements in restraint of legal proceedings (Section 28)

Agreement which are uncertain and ambiguous (Section 29)

Agreement by way of wager or wagering agreements (Section 30)

Agreements to do Impossible Acts (Section 56)

The above agreements are explained below in detail:

AGREEMENTS IN RESTRAINT OF TRADE (SECTION 27)

AGREEMENTS WHICH ARE UNCERTAIN AND AMBIGUOUS (SECTION 29)

AGREEMENTS TO DO IMPOSSIBLE ACT (SECTION 56)

b. Agreement in restraint of carrying of trade after sale of goodwill. Can this

c. Compensation for voluntary services. Is this agreement without consideration

d. A supplied goods to B. A promises B that he will not sue B after a period of 3

Source: Nirmal Singh. Business Laws.

12.8 Remedies for Breach of Contract

12.8.1 Suit for Rescission

12.8.2 Suit for Injunction

12.8.3 Suit for Specific Performance

12.8.4 Suit for Damages

Indirect Damages (Loss of Profits)

12.8.5 Suit for Quantum Meruit

c. Govind agrees to sell a house to Arvind and a contract is entered into.

12.11 Suggested Readings/Reference Material

12.12 Suggested Answers

12.13 Terminal Questions

 Know the mode of drafting the contracts.

13.3 Contracts of Indemnity

13.3.1 Rights of Indemnity Holder when Sued

13.4 Contracts of Guarantee

13.4.1 Types of Guarantees

13.4.2 Liability of Surety